Diageo PLC (DEO) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Diageo half-year results announcement call. (Operator instructions).

I will now hand you over to your host, Chief Executive, Mr. Ivan Menezes, to begin today's conference call. Thank you.

Hello, everyone, and thanks for joining the call. Deirdre and I are here along with Catherine in London. I assume you've had a chance to go through the press release and listen to the webcast, so why don't we go right to questions and open up the conversation.

(Operator Instructions). Ian Shackleton, Nomura.

Free cash flow looks pretty good in the half, and I think, Deirdre, in the presentation, talked about the cash conversion improving for the full year. I just wonder if you're able to give us a little bit more granularity what that might mean, particularly where working capital might go for the year. I think last year you produced free cash flow about GBP1.2 billion; can you give us a bit more granularity of where it might be this year?

Morning, Ian. I can say that we have been focused on improving working capital. You will see that we had a good performance in the first half and there is still good opportunity for us in the second half.

We're aiming to get our cash conversion to 100%, and working capital will play, obviously, a piece of that. I wouldn't comment on the specific elements of working capital because it does depend on where the various growth elements are and, to some degree, the phasing of shipments towards the end of the year. But it will still remain our goal to improve our cash conversion, and we expect to make consistent improvement in working capital through that period.

Just as a follow-up, and it touches on this, when we think about the investment in scotch whiskey and stocks I think, in the first half, the maturing stocks went up [170 million] still, should we still expect you to be laying down stocks in the same way you have been, given the weakness we've got in some of the key scotch brands?

We look at our scotch whiskey production on over the long term, and we make adjustments as and when appropriate. You should expect that we will continue to lay down stock. I won't comment specifically on the precise variants from the first half, but I wouldn't expect there to be material short-term changes in our [maturation properties].

Very good. Thank you, Deirdre.

Chris Pitcher, Redburn.

One of the statistics you've put in the presentation that struck me was the fact that half of your business has improved at forecasting accuracy. The result of that is you've found you've got a lot more stock perhaps than you may otherwise have wanted. Could you give us a bit more detail what was actually required to improve the forecasting accuracy, what were the failings beforehand? Does this mean there's still half of the business where we could see further improvements?

A follow-on from that is just give us a feel for the scale of the stock issue when you took over as CEO, and can you be confident that it should find a base by the end of this financial year? I know you mentioned you expected some more in the second half, but you're comfortable you'll get your business clean by the end of the year?

Hi, Chris. Good morning. On the first point on forecasting, as you know we've got tremendous focus behind our route to consumer must-do initiatives, and within that S&OP process, discipline is something that the general managers, and Deirdre, and the supply teams are leading very strongly. So this is just fundamentally putting a lot more focus on stronger execution and getting the basics right.

We are demanding this of our markets and general managers; we're measuring it with a lot more rigor, and you can see the improvements begin to come through. I'd say we're still in relatively early stages of this journey, but we're not letting up. This will be one of the sources of improving working capital and cash conversions over the next couple of years.

On your broader point of stock reductions and will it end by this fiscal, let me just first characterize it. There's two things that determine that; one is the level of depletions that are happening in markets; and clearly, the second is what we ship in. The picture is a little varied. I'd say overall I expect to make a significant dent into it this year, but there will be places, and I point to South East Asia, where I don't think we'll be through because the depletions are still weak, in the free trade zones in Asia. We'll have some amount of it continuing into next year, but you know what, this is all good stuff, and we're doing the right thing for Diageo to get the visibility back to the right place.

Likewise, I cannot quite predict when we'll see the acceleration in depletions. Say West LAC right now is somewhat stable, but at some point we would expect to see improvements come through. Those haven't happened yet.

So I'd say that's a bit of how I view the world. We've made a significant dent into this year. There will be some pockets which will continue into next year, but we will manage that in the profile of the total business growth momentum as we go into fiscal 2016.

And if I may, while we're on the topic, in terms of finding a base in FY15 specific to the India business, the sales momentum for United Spirits seems to have improved in the last couple of quarters. Do you feel that, with their original efforts and your subsequent efforts, that by the time you close this financial year, the shape of the portfolio will be much more where you want it to be and we could expect growth off that base?

We are in the middle of the integration and transformation in United Spirits. As you probably know, in the second half we will be integrating the Diageo brand fully into the United Spirits' platform. That's a complex process which will take us through the second half of the year.

I must say overall, on India and on United Spirits and Diageo, I feel very good about where we are. We've got the new management team in place. We've put in place our governance and compliance practices and have delivered this performance while we have made all those changes.

So the momentum is good. You can see it in the premium and prestige brands continue to do well. Our portfolio strategy is clear, which brands we're going to support. We're bringing the Diageo skills into India on revitalizing the brand, the portfolio, our innovation skills. So I'm confident that India should deliver good growth, both for the balance of this year and then into fiscal 2016. Fundamentally, all the elements are on track.

Thank you very much indeed.

Nik Oliver, Bank of America.

Just coming back to the comments on the dividend, I just wanted to clarify that we will see growth in absolute full-year dividend, it's just that the rate of growth may be slower than the 9% seen in the first half.

And secondly, just given how strong cash flows are in the business, could we see a situation where dividend cover did dip below the lower end of the 1.8 to 2.2 times range in the short term? Thanks.

Yes, you're absolutely correct. Our policy is for a progressive dividend and if there's an adjustment, we expect it to be at the rate of [progressive] dividend, so absolutely.

I think to your second question, yes, the policy of 1.8 to 2.2 times, we don't just apply that policy mathematically. But obviously, when we get to the lower end of the range or the higher end of the range, it will cause us to think carefully about what the dividend will be, going forward. So it is possible and has in the past, actually, been outside of that range for brief periods.

Okay, that's great. Thanks for clarifying.

Jason Derise, UBS.

I wanted to ask about the US business. Obviously, you're flagging the good growth out of Bulleit, but it's still quite small. So I wanted to get a sense of how you're balancing the need to keep it crafty, but also some of the urgency to make it larger, because that part of the market is growing so fast.

And then the second part of that is, there are other brands that you have in the whiskey space that are not performing as well, so Crown Royal, Johnnie Walker's a bit mixed. Can you talk about the strategies there to be able to better participate with where the US market's growing?

Sure, Jason, first let me say our whiskey position in total in North America, across North American whiskey and scotch, is a very strong one and well positioned for where the market is going.

On the specifics, Bulleit, you're absolutely right. I want to make sure Bulleit stays with the Hipsters and Williamsburg and does not become a mass brand, but it's got tremendous scale. This is growing at 56%/57%. We talk about Bulleit being small, but 20% of the bourbon and rye growth in the US is Bulleit, so it is having a material impact on the category.

Listen, our approach here is we're not going to do large-scale TV advertising and what you do with big brands. We're going to keep building it through advocacy with bartenders; there's a lot of word of mouth; there's a lot of experiential stuff.

We're going to be very focused on the on-premise, the brand is really hot in the on-premise, and let the consumers come to the brand. And retaining its craft credentials is crucial. It helps that we have Tom Bulleit and the family behind the brand. Tom is very active in the leading-edge elements of opinion forming in the whiskey community. So those are the things we're doing.

We are also looking at building it globally and, again, to your point I'm not keen to just go chase volume. I want to build this brand the right way everywhere in the world, and it's going to be part of our reserve portfolio.

On your point on our other whiskey brands and why they are struggling or underperforming, Crown Royal has had a weaker 18 months. We are doing a number of things on Crown Royal which gives me confidence we will see improving momentum.

One is, the whole approach to the brand is going to come back very much to talk about the craft and the quality of the whiskey. It's a sensational liquid. We've got 50 very crafted liquids that go into Crown Royal. We're doing barrel programs with Special Crown Royal.

We have several line extensions. There's one in place right now, which is early days but very encouraging, which is the Crown Royal Regal Apple, which has been in the market a couple of months. It's hitting the [IRR] in NABCA's top innovation list, and we're seeing base Crown Royal improve. So I'm cautiously confident you will see improved momentum on Crown Royal.

The rest of our portfolio, actually, we've got a lot going on. We've got Orphan Barrel, which is the high-end craft bourbons doing well. We are putting more energy behind George Dickel. Dickel is getting quite a cult following as well in the places in the US where whiskey trends are getting set.

And so in total, I do believe we have the -- and we've got a couple of new ideas. We're bringing in IW Harper back in. We're introducing Blade & Bow, which will be a new entry also in the bourbon segment. So our North American position, where we have underperformed in the last 18 months, largely because we didn't [write] the flavors [right]. Most of the North American whiskey boom has happened out of flavors, two-thirds of it. I'm very clear that a brand like Bulleit, we're not going to chase flavors. Bulleit is such a beautiful brand in bourbon and rye. We're going to stick to our knitting, build it the right way. But with Crown, I do see that momentum come back.

So overall, North American whiskey, I'm cautiously confident you can expect to see us perform better while continuing the momentum on a brand like Bulleit.

Then the other side of the portfolio of the US, the white spirits that I guess most of the focus will be on, Smirnoff. How do you think you can turn around the share loss of the vodka category as there's a couple of brands that are growing rapidly that explain the growth of the vodka category, but what's your view on when Smirnoff can turn around?

As we talked about for the last 12, 18 months, we are in the midst of the revitalization program on Smirnoff. I'm encouraged with -- and then you've got another dynamic, which is flavored vodka, is clearly challenged and 25% of the Smirnoff business is flavored vodka. There, we are seeing still continuing challenges.

On base Smirnoff, we actually are finally seeing market share improvements, small but in the last few months Smirnoff Red, the base vodka, has actually grown market share. And as we go into the new calendar year, I would hope we would see that momentum continue.

Overall, our North American business, as we close this quarter and go into the next quarter, both in NABCA, particularly in NABCA, you're seeing a little more improving momentum on our premium core brands, including Smirnoff.

Okay. I can probably ask a few more on this, but I'll let others have a chance, thanks.

Simon Hales, Barclays.

I just wanted to follow up on Chris' question really, just around stock levels if I can again, Ivan? I appreciate that, clearly, depletion trends play an important part with how quickly the destocking takes place. But when you look at something like the destock in South East Asia, I think if we go back to the full-year numbers you were expecting that perhaps to be a GBP70 million [hit] over the course of this year to your sales. Is the absolute size of that destock, even if it flows in 2016 fiscal year, still at that sort of level, or are you finding further pockets within those different markets where inventory needs to be reduced?

And maybe following on from that, back to Deirdre's comments around the forecasting accuracy that's improved in half of your 21 markets, is the other half of those markets, is that still to come through improvement, or have those other half of the markets already put those improvements in place and, therefore, we shouldn't be expecting to find, six months from now, that you've found another big lump of stock in one of these new markets that you've applied those improvements to?

Hi, Simon. Thanks. First on South East Asia, it's still GBP70 million, but it will take a bit longer, is what we're saying.

On the other markets, twice a year we have all our general managers in and just last week Deirdre and I were with them. There is focus, sharp focus, on improvement in all markets, so it's not like the other half where there is [not] room for improvement, so you will see that discipline continue.

And on the broader point on this and on stocks, I think one of the encouraging aspects of our performance in our first half is our depletions are running ahead of our shipments. And I think as I mentioned in the last call, we now track performance at the depletion level and it's all about sellout. You don't tell me what you are selling in, I want to know what's really selling out, and that's what we're measuring and holding our markets accountable for.

All these changes, the S&OP process, the sellout orientation in all our metrics, I think that's part of what is going to make us get far better visibility of underlying trends and make us more agile in terms of responding to marketplace movements. So it's all, more to play for. It's well underway and every market has scope for improvement.

In fact, let me just add to that, that going forward as the capabilities in market improve in that area, because of the focus on sellout we should have less. This is the intent, that we will not have the circumstances where the inventory builds because we have greater transparency into what's happening on the sellout basis in terms of distribution and rate of sale. And therefore, we can certainly manage better what's happening to our in-tray, in-market inventory level.

Okay, thanks. Can I just follow-on on a separate issue and just ask you about China as we head into the second half of the year and looking to Chinese New Year? Actually, Deirdre, you made some comments earlier on the newswires around thoughts around Chinese New Year. I'm just wondering if you could maybe expand on that a little bit, particularly around your premium scotch business as we begin to lap, obviously, some of the restrictions into the on-premise that went in earlier in calendar 2014. How are you feeling about the scotch business, looking forward?

I would say the scotch business for the balance of this fiscal year will still be tough. We're going through a big adjustment. The traditional on-trade has really shrunk; the modern on-trade has gotten very competitive where a lot of scotch is being contracted. We have been very disciplined. We're not chasing volume to buy it, so I would expect us to have a continued decline.

As we go forward, though, we're confident that we will get the scotch category back into growth and [see our business grow]. We are putting -- our focus is really on Johnny Walker Blue and the super deluxe end of scotch where we continue to remain confident.

To your point on Chinese New Year, it's early, but I would say we are seeing encouraging early trends that it should be modestly better this year versus last year. But it's early to call. We're seeing it in Baijiu, in particular with Shui Jing Fang.

Brilliant. Thank you ever so much.

Trevor Stirling, Bernstein.

Just a couple of questions from my side. One, coming back to USL, maybe one for Deirdre, when I look at the contribution from USL coming into the accounts Deirdre, it's implying about a 5% operating margin, but it looks to be quite a lot lower than what USL are reporting on their accounts. Is that because of translation from Indian into IFRS, or is there acquisition charges that are depressing margins, as reported in your accounts?

I would expect that there certainly are some adjustments from the Indian statutory accounts into the Diageo accounts, as well as purchaser price adjustment, so there would be some combination of the above that would be driving that.

And I know you've got ambitions to improve the margin at USL over time. Any broad guidance in terms of how long you think it will take to get USL to the place where you can start to see margins rise again?

I think we've said, in this first period where we've been talking about the integration that we've been going through, that it is on track. And we do expect, I think when you get past this fiscal year, on the trends that we're on, we should expect to see some improvement. Some of that may be reinvested behind the brands because, as the brands in the market evolve, we'll see. But I think we can start to see some of the pressure that you would have seen, for example in that 5%, come through after we get through the first year when there are a lot of integration costs and accounting adjustments flowing through the account.

In terms of underlying performance, that was our expectation, is that after we got through the first full year we should start to see some positive trend. I wouldn't expect it to be an abrupt c-curve, but gradually, year on year, you should start to see improvements.

Okay. And second question, maybe one for Ivan, as I read through the details of North America, Ivan, I [strike] that a lot of the brands had tough comps from pipeline filling in the prior year, whether it be Captain Morgan White or the premium qualities on Johnnie Walker. If you eliminated that pipeline filling, what do you think would be the benefit to top-line growth in North America?

Trevor, let me just characterize the underlying business, not the shipments, but say the underlying depletion value trend in North America in spirits. We're running probably about 2.5% growth; against industry or markets that's 3%, 3.5%, so we're underperforming it slightly.

When you look at the source of underperformance and why, there are a few things going on. One is, we did take a lot of price in the last couple of years, which has really hurt us on those premium core brands. If you look at the last three years, I think we expanded operating margins in North America 450 basis points, and a brand like Captain Morgan is now sitting at a 25% premium to the leading rum brand. A brand like Smirnoff had moved on price increases in prior years when vodka was heading the other way, so we're making adjustments for that.

The second thing is, a couple of the category dynamics had gone against us. We did not participate in the North American whiskey flavor explosion. I think we will be correcting that. And flavored vodka took a big hit, which hurt Smirnoff disproportionally since we're by far the biggest market leader in flavored vodka.

Now on the other hand, our reserve brands are very strong. As you know, Bulleit, Dickel, classic malts, Don Julio, Zacapa, Ciroc, all of those are performing very well.

As you look at going forward, we need to get that underlying depletion improved from where it is. I'm not calling that recovery fast yet. It will take us time as we go through the course of this calendar year. But the trends as I referred to earlier, we are seeing improving trends on those core brands come through and, as we go through the second half of the year, I would expect those to continue.

To your point, there was a lot of innovation in the pipeline. When we closed last year we expected a stronger holiday season, so we're adjusting some inventory levels as well as we go through this. And if we get upside from a consumer standpoint, that we would, in the course of the second half, I would say we would adjust it through our shipments. I think we would want to just get our shipments more in line.

And we had about 400,000 cases of lower shipments, which was worth about 2% of growth in the half.

Very good. Thank you, Ivan.

Nicolas Ceron, Societe Generale.

Would you be able to talk about the associate net profit, which were down sharply this half? Were there any exception on it, or shall we expect the same kind of decline in H2?

And also maybe a more general question on the US. Number of companies in [staples] are talking about a better consumer environment recently. Is that something you've seen? Have you seen any pickup in demand in December and January? Have you seen a better on-trade recently? Thank you.

I'll address the question on associates. As you know, the associate income is a function of the entities at which we're holding a minority share, and it is entirely dependent upon the performance of those entities. And so I think, in the second half, we'll see what happens to the performance, and that will come through in our accounts.

On the US, I think if we look at the last couple of months, as I think Larry Schwartz said on his call, Thanksgiving was relatively subdued; we didn't see a big increase. As we closed-out Christmas and the New year, things strengthened a bit, so it got a little stronger as we got through December.

January feels good. And I think the thing we want to be cautious about, because you know in the last two years, the US recovery, we've been waiting to see when it would translate into a bit more consumer exuberance. And I think you still see Middle America fundamentally taking a lot of their gains, say from lower gas prices, etc., there's deleveraging going on, and that cycle is still playing out.

But I'm cautiously -- I'd say there are signs that are cautious we continue to see a bit of gradual improvement in underlying consumer demand. The on-premise has picked up a bit, and that's a good indicator, and usually an early sign. But we're not going to call it until we see it, and I'd say our stance on this is, we're prepared to ride it when it comes, but we're cautious in terms of calling it until we see a sustained trend.

Okay. Thank you.

Martin Deboo, Jefferies.

I'm obsessed with inventories, as Chris and Simon were, so let me just ask a couple of incrementals to what you already said to them. What was the influence of inventory reduction, if any, on the decline in Walker, which I think was down 9% in volume in H1?

And Ivan, you also mentioned something on the webcast; I think you quantified the inventory headwind as 1.5 percentage points, but it wasn't clear to me if that was a headwind on the Group or within a more restricted part of the Group. The context of it wasn't totally clear to me. If we could just get clarity on those two, that would be good.

Sure. Johnnie Walker, all of it is inventory, so underlying Johnnie Walker's healthy. And the 1.5 is on the Group.

Okay, that's very clear. Thank you.

Andrea Pistacchi, Citigroup.

I have two questions, please, both on the US. The first one, you talked about the adjustment on your core brands, Smirnoff and Captain Morgan; some rebasing of price, to some extent. Of course, it depends a lot on what competitors do, but what is your best expectation on how long it will take to fully stabilize these brands?

And the second, again on the US, you've had two big launches with Ciroc, Crown Royal. Ciroc was up strongly, more than 20%. Was there a pipeline fill element in that, or are both brands showing strong depletion trends? And how confident are you that in 2H these brands will have strong underlying momentum?

Sure. On the first question, Andrea, on Smirnoff and Captain Morgan, the premium core, this is going to take time. And I would say I would hope to see sequential improvements gradually, slowly, as we go through the course of this calendar year. I think it's another four quarters of consistency, whereby we would -- where I'd be at a point. I don't want to call it before we get to the end of the calendar year that we've got these brands in a healthier top-line share performance.

On the two big innovations, clearly, there's an element of pipeline fill, because we were launching them in the last couple of months. However, what's really encouraging is, the consumer uptake has been extraordinary, and you can see that in Nielsen and NABCA.

Ciroc Pineapple is off to a tremendous start, and it is really pulling through. And we will need to see, as we go through the course of the second half, those trends continue.

Crown Royal Regal Apple actually is also pulling through; in fact, we are out of stock in many markets. We've got to make green bags for that product; we're running out of bags right now. But the brand is -- what's interesting with Crown Royal Regal Apple is, it's cutting across demographics; it is showing up in non-core Crown Royal markets, like in the north east. You find it in New York and Brooklyn now, where Crown Royal didn't have much of a franchise.

So it's early days. I don't want to get too excited, but the team is scrambling to keep up demand, and I do believe we will have a strong H2 on that brand as well.

Is there a technical reason why -- I see Crown Royal was, I think, down 1% in NSV in the half, yet you would have had a bit of a pipeline fill element. Is there a reason why the brand wasn't growing more despite the pipeline?

Yes, we were counting another innovation launch in the previous half, Crown Royal XR, so that was it. And Maple Finished, so we had two big innovations in first half of FY14.

Eddy Hargreaves, Canaccord.

Looking at your overall volume performance, down [2%], within that, obviously your global giants, those six brands, have underperformed that. You've mentioned some things that we know about, going on in the US; destocking, pricing, etc., etc. But if we look at volume and, indeed, organic net sales performance of these top six brands, the global giants, it's clearly quite a tough dynamic to deal with at the Group level.

When would you think that, as a whole, this group of brands could move back to growth? Do you think fiscal 2017/2018 is too pessimistic? And then more generally, should we expect these giants to be growing faster than the total portfolio, or slower, on an ongoing basis, medium/longer term.

And if I could just pop in with a completely different one. Could you perhaps give us your thinking on dropping the quarterly IMSs, going forward?

I'll have Deidre address the IMS. On the global giants brands, clearly what you're seeing right now is what we've talked about, Eddy; some of the corrections that are happening in stock levels and market disruptions. So you've got some of the brands impacted; Johnnie Walker's what's happening in South East Asia and West LAC, but also what you're seeing in Russia, where we see a kind of a one-off slowdown.

I would expect these brands, as we go through this adjustment, really come back into decent growth as we get into FY16, but then really builds from there as we get into FY17 and FY18. These are our priority brands. These and the reserve brands really are the engine of the Company, and so our focus is going to be very much on getting the trajectory of improved growth coming through on these.

What I would say is, if you look at underlying consumption, consumer uptake, I get encouraged about the health of the brands and the underlying consumer [offtake] that's taking place. Scotch whiskey in Latin America is -- it's a question I always ask, and if you go into Mexico and Colombia and Brazil, it is a very strong, thriving, the aspirational and status values are intact.

So the category and our brands, Johnnie Walker and Buchanan's and Old Parr are all in good shape. And that's what we look at very carefully, and that's what gives me the confidence that we will see improving trends come through. IMS?

On the IMS, we will publish and IMS for the nine months ended March, 2015. When we come into our next fiscal year we will not publish IMSs for either the first or the third quarter. We made that decision after some consultation with some of our largest investors, who were supportive of that. And so that's going to be our position, going forward.

And sorry, the reasoning is?

I think the reasoning is consistent with the reason why the regulation was changed, is that we think we're focused on the long-term performance of the business; we're very clear in our half-year accounts on what we're doing to drive performance in the business; and we believe that that provides good information to the investment community on order to base their decision.

Obviously, if there's something that needs to be reported, we'll report it. But in terms of just regular quarterly statements we intend to discontinue them.

Sure.

Anthony Bucalo, Santander.

The question is for Deirdre. Simon asked a question about inventory, and the response was that you're moving towards a culture that is much more focused on a depletion culture rather than a shipment culture. Can you talk about that in detail; do you need better ways to measure your depletions; do you need to work more closely with your distributors; do you need to work more closely with the retailers? What is the practical impact of moving from a shipment to a depletion-driven culture?

I could talk about this for a long time, Tony, but for the benefit of everybody I'll try to [address your] point. I think it's some of all the above; it depends on the nature of the market. So in some markets where we sell direct to retailers there is good published data; it's quite easy to see, a la AC Nielsen for example, what's happening.

In other parts of our business, like where there are wholesale channels and there are two or three tiers before you get to the consumer, it can be more difficult to really be able to see that. And that will then involve our working closely with the first line distributor and then trying to triangulate that with in-market information, so that we have the best available information about what's happening in the market.

So it does vary. I can say as I was talking about in the presentation in the improvement in sales forecast accuracy, we are finding that the focus that we now have on our executional imperatives around the premium core distribution points, rate of sales, what's happening on reserve brands, planning for innovation, commercial planning, that level of detailed attention is giving us a much better insight, not only into sales forecast accuracy but then, obviously, as you look further out, what our inventory requirements are going to be.

But what is required to do that will vary a bit depending on the market structure. In most cases, it doesn't involve a significant investment; in most cases it just involves actually going to track the detail and making sure you're confident in the quality of the underlying detail. There may be some local in-market tools that are put in place to facilitate it, but most part is just getting really down and clear on what's happening [at the top].

Okay. So your local operators, are you going to encourage them to spend their time a little bit differently in terms of collecting that information or triangulating that information, where will that burden fall generally?

Yes, absolutely, it will be at the local level because it is the people who are in the local market, those teams on the ground that have the best information. In some cases the information was there before, but when you have a sell in kind of structure they're much more focused on order taking from the first line customer and then they assume the next order will come. The reason why the forecast accuracy improves so much is now we know what the take-off is on the back end. So your relationship with that first line customer is much more informed and you can actually have an opportunity to improve their working capital position as well as our supply chain.

Okay, great. Thanks so much.

Jason Derise, UBS.

On the cost savings that came through in the first half, just my simple math is that would have been a 2.6% benefit to EBIT, the [GBP53 million]; obviously organic EBIT was less than that at [GBP0.7 million]. How should we think about, going forward, that flow through, what would need to happen to achieve maybe a better flow through in the second half of the year?

Well, some of those savings that came through was because of the timing of the initiatives. We do expect bigger savings in the second half than in the first half as they start to come through, because when the changes take effect it depends on when those changes come in to us. If some of them actually were not effective in the first quarter then you only get a piece of it in the first quarter; you'll get all the benefit of that saving plus more in the second half. So I would expect the amount to improve about GBP57 million additional in the second half.

Okay. That's the run rate at the end of the half is the GBP53 million; that's the way to interpret it, how much contributed, okay. And any comments about which regions that broke out into?

It is spread in a number of different places because the global -- remember there were a few different things. There is our global operating model program, the global efficiency program, and then there was some supply excellence programs. It is in a number of different regions, so there would be some savings in every region and through supply as well as in corporate. I don't have in front of me a breakdown of what it is by region, but it is spread throughout the business; it's not just featuring in one place.

Okay. Thank you.

Andrea Pistacchi.

It's on emerging markets. Now you've had a much better performance in some emerging markets; others like China and Nigeria were clearly less [bad], more or less stable. To what extent are these sales trends sustainable, or were there technical aspects besides obviously the easy comps, which may have helped the performance like rolling out, I don't know, Orijin or Haig into China/Nigeria. Should we expect these trends going forward?

Yes, I think we should really -- we look at it market by market but just to the two you picked, in Nigeria we are seeing sequential improvement; clearly, Orijin has been a big piece of that. However, if you look at the underlying executional changes, we've got a new management team in Nigeria; we are making rapid strengthening of our route to consumer. We are investing behind our brands, including Guinness, which is still challenged in Nigeria, but we can see some of the equity measures move.

So I would expect [a rapid] -- and we're gaining market share in the last few months, just a little bit, so I would expect that to continue. Clearly, the external environment in Nigeria is pretty volatile, right; we still haven't seen the full impact of the oil price reduction played through in the consumer market yet. We've got elections coming up; we've got the currency clearly depreciating. So we'll need to work through that, but I think you can -- I feel confident you'll see our relative performance, or share performance, continuing to get stronger in Nigeria, and our spirits business as well will continue to perform.

In China, the Baijiu business is now in a position where I would expect to see a good growth, clearly from a rebased start. On our international brands, scotch whiskey, Johnnie Walker has taken significant declines this year due to all the channel disruptions. So we'd see that continue in the second half, will be tough, but as we get into fiscal 2016 I would expect us to do better.

In general, I think when you step back, Andrea, the way I look at the world is that we still have a fair amount of volatility and we're not assuming a better improving economic environment. However, we do expect our performance in each market, from a competitive sense, to improve, and that's really where we're putting all our focus and our energy.

Thanks.

Okay, I think that's the last question, Catherine, so why don't we ask the operator to -- shall I just close it here? Okay. Well, thanks everyone; good to have you on the call; thanks for your questions. Deirdre and I look forward to meeting some of you over the next few weeks. Appreciate your support and interest in Diageo and have a good day. Thank you.

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