Diageo PLC (DEO) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Diageo 2016 interim results call. My name is Dave, and I'll be your coordinator for today's conference. (Operator Instructions).

I'm now handing you over to Ivan Menezes to begin today's conference. Thank you.

Thank you, Dave. Hello, everyone, and welcome to our call. I hope by now you've had a chance to look at our press release and the webcast. I'm delighted to have Kathy Mikells with me here, our new CFO. We are both in London and ready to take your questions.

With that, operator, let's take the first question.

(Operator Instructions). Olivier Nicolai, Morgan Stanley.

I've got three questions, please. First of all, in the US, the Captain Morgan performance was much better. Are you comfortable with the price points of the brand at the moment, or does it need to be adjusted further?

Second question is on China. The scotch sales were down 42%; now, could you give us a bit more details on this? And do you see in wholesale a de-stocking? And what's actually the underlying performance there?

And just lastly, on Nigeria, do you still lapse the distribution gain from Orijin in H2 this year? And could you comment, perhaps, on the consumer environment over the last few months; if it has deteriorated, or not? Thanks a lot.

Sure. Thank you, Olivier. I think on the US, let me just take a minute and just describe just how I'm feeling about the US business overall, and I'll touch on Captain Morgan specifically.

As you'd expect, this market is my top priority. And I'm pleased with our performance and progress in this half. We came in exactly where we told you we would. And, as we've explained, the timing of our first half/second half is driven by the timing of Ciroc's innovation and the replenishment model in innovation.

Our overall spirits business is growing, depletion-wise, about 3% in a market that's growing about 4%. We're slightly ahead in the first half on NABCA; we are slightly behind on Nielsen.

Now, to your points, the things I'm most confident about in what we're doing in North America on the key brands, so Smirnoff and Captain Morgan in particular, we have taken the pricing adjustments. Not all of them have worked through, because you've got some timings in certain states where we moved.

We've moved on adjusting Captain Morgan White to be more competitively priced, and in some markets OSR as well.

And beyond the pricing adjustments we've done, the on-premise activation is heavily up-weighted through the Activation Army, and particularly targeting the 21-to-29 year segments in the on-trade. That is up-weighted. And we have a significant weight behind our new campaign, GO FULL CAPTAIN.

So, all of that will go in to greater impact as we go into H2.

But just a few other points on North America. The new team, Deirdre; James Thompson, who is now the CMO; Tom Looney, heading up the US; Jakob Ripshtein, our new CFO, I feel very confident about the new team.

We have made significant changes in marketing, and I can see the programs coming through much more strongly. We've made the pricing adjustments, as we've talked about. We've got a lot of momentum in the portfolio on Crown, Bulleit, Buchanan's Malt, Don Julio; we're going to keep feeding that.

Our route to consumer is stronger with some of the changes we made with our distributors. We are putting more resources in the on-premise and on Activation Armies. We have shifted to this replenishment model on innovation. On the value brands, like VO and Seagram 's 7, we've made adjustments.

And I also believe, and it only starts in January, with the exit from wine we are going to get a lot more executional focus against spirits, and that will play out in the second half.

And, of course, we're driving good productivity, both on supply chain and on our trade spend and marketing.

So, net-net, I'm confident that H2 will be stronger. But just wanted to share that perspective overall on North America.

On China, China, there's a few things going on. Scotch, in total, is down. It's mostly deluxe scotch. And it's primarily driven by a very conscious decision from us to back off the very high cost of investment in the on-trade. And most of deluxe scotch is consumed through contracts in the on-trade; it is not profitable business, and that segment of consumption is still declining in China, so we're backing off it.

Super-deluxe scotch, we're doing very well, and, in fact, are growing share on Johnnie Walker Blue; the Johnnie Walker houses; Haig Club is doing well.

And then, our main business in Mainland China, I'm delighted to say Shui Jing Fang and Baijiu continues to do very well. We were up 60-plus- in the half, and I expect that momentum to continue.

Conditions in Nigeria, your third question, Olivier, no question, the macro environment is tough. We are seeing continued down trading. Our business in Nigeria actually was significantly impacted by Orijin, which was lapping an extraordinary year last year.

But I'm pleased to see our Guinness business back in to momentum. We're in double-digit growth on Guinness; and our value beers, Satzenbrau in particular, is also performing well. And as we go in to the second half, I'm also optimistic about what we're going to be doing in mainstream spirits.

So I think it's fair to assume Nigeria will stay a challenged market. But our portfolio now is much more balanced, and will be more resilient in our performance, going forward.

Thank you very much. Very clear.

Ian Shackleton, Nomura.

Three financial questions, I guess, for Kathy. When we think about working capital going forward, certainly, you're bringing down the maturing stocks in this half. Is there real opportunity to shrink working capital further in the next few years?

Second question was around I think on slide 15 you'd highlighted obviously overheads had gone up and explained a little bit why. There again, I'm quite keen to know what will happen in the second half, and looking further out, on the overhead line.

And the third question was around tax. I think you were reiterating that 19% is the right number for the full year. Can you give us some thoughts about where that might go longer term?

Sure. So why don't I start in with the first question about working capital. Working capital, on a total combined basis, was an incremental use compared to the prior period of GBP45 million. You're right, within that we saw inventory come down a little bit.

If you dig a little further in terms of what was happening in the debtor and creditor piece, we actually saw on the debtor side long over dues coming down, which I think is really positive. And so, I think there continues to be further opportunity there.

If you also consider our United Spirits subsidiary, they have a heavier working capital model right now than we have, and we think there's incremental gains to be made there.

So, there's a little bit of timing things going on, on the creditor side in the prior period. We had the Korean tax settlement embedded in there and so that was giving us overall creditors not increasing on a year-over-year compare basis.

But we continue to push working capital really hard and we're looking to bring it down as a percent of sales, and I would expect over time we will continue to make positive progress there.

I think the second question that you asked me about was specifically as it related to overheads. We did see an increase overall in overheads. Specifically, we have a lot going on half over half in the bonus accruals, so that went up GBP33 million. In addition to that, we're obviously seeing some inflation in overheads.

If we look to the second half, I'd say, from a bonus perspective, we probably still see a little bit of increase, but nothing near like we saw in the first half. And again, the inflationary upward movement that we're seeing is also going to continue.

If I look forward beyond that, which I think is pretty important, we've got a big productivity plan underway to really embed productivity on an ongoing basis.

The Company has put out a very big program for the next three years, GBP500 million. We are well underway across six big areas in how we're going to get at that, and the detailed plans to get us off to a good start in 2017. And so that's what we've guided you, ultimately, to get overheads down.

The last question you asked overall is about tax rate. We've guided to a tax rate for the full year of 19%.

I would characterize the environment overall as headwinds on tax rates. Every jurisdiction is scrutinizing this much more specifically. And we pay the right taxes, absolutely. But as you look at just how the environment is changing, I think for Diageo, and most corporates, over time, we're going to generally see tax rates floating up.

Now, this is direct tax. Obviously, Diageo pays a whole lot of indirect tax. Within that productivity program, we will continue to look at our overall footprint, look at our approach in terms of where we're importing products, what products we can potentially manufacture within markets, and everything else we can do, I'd say, to look to bring down our total tax bill, both direct and indirect combined.

Sorry, just coming back on the first point on working capital, should we expect maturing stock inventory to continue to come down in the next year or so?

We have a long term program on maturing stock, and so while we may have a given half or a given quarter where we see differences in, I'd say, our overall production levels relative to shipments and how we're balancing out capacity and manufacturing [in stock], long term we're looking to lay down stock consistent with a long-term growth rate in the scotch market.

Okay. Thanks very much.

Simon Hales, Barclays.

Two or three questions, if I can please. Just, firstly, can I drill down a little bit more into your comments around the H2 margin expectations of broadly flat? I would have thought, given the absence of the 30 bps drag you flag in relation to the US in the first half, that we should have been expecting to see a little bit of underlying pickup in H2.

You talked in the presentation around higher A&P spend in the second half, but I'd just be interested in any more color you can give me in terms of maybe where that spend's going, why it's stepping up.

And then secondly, going back to Nigeria, some companies have been flagging some more recent difficulties, getting hold of hard currency on the ground there. Is that something that your subsidiary is seeing? And how do you think about potentially dealing with those issues when it comes to importing raw materials?

And then finally, Ivan, back at the full-year results in the US you were talking about the focus on improving some of the tail brands of the portfolio. I'd just be interested in an update as to where we are on that journey.

Sure. Thank you, Simon. Why don't I deal with Nigeria and tail brands, and I'll ask Kathy to come back on H2 margins.

On Nigeria, the -- no, you are right; I think there is small potential downside on FX and currency. We are not facing yet. The government is starting up certain things on taxation, etc., and making it a little more difficult. But we are -- I am assuming Nigeria is going to get tougher, and I say that's the mindset the management team is working to over there, and in terms of managing local raw material sourcing; how we manage our FX exposures, our management of imported products.

We will be -- as an example, you will see us do more on local manufacture and mainstream spirits, which products today from USL, for example, get imported. But we're in the process of setting up a route to market there, and a production capability, where we will look at local manufacturer, McDowell's.

So we're taking those kinds of actions. And we are assuming an environment that will get tougher.

On the US tail brands, we've done a -- we've been testing a variety of things in the first half. One of the things which I'm encouraged by was in 13 markets we took Seagram's 7 and VO and ran some tests to stabilize volumes there, which were encouraging.

And Deirdre and the team -- I've said before, the tail brands have been quite a bit of a drag on US spirits performance. So we're making adjustments there, and I expect some improved trajectory on the tail brands. And the testing we did in H1 was encouraging in that regard.

Kathy?

Okay, I'll come back to talk a little bit about our margins. We talked about marketing overall in this half and that we saw marketing spend come down significantly. If you peel that back, what's really going on [in these] marketing part of what we saw is less spend on US innovation, because we just had less innovation in the half on a year-over-year basis.

We also had a lot of procurement savings. And Ivan already talked about some of the specific withdrawal of marketing in China with regard to scotch.

So when you go to look at the second half, we're not expecting to see that GBP40 million decline year over year that we saw in the first half. And so that's a part of what's going on.

The other thing that I would call out is we did have a gain on the [UBL] shares in the first half as well. And so overall, we're not expecting something like that to repeat in the second half. And so that's really what's going on overall.

If I come back to our full-year expectation, I'd say we're at exactly [what] we thought we would be at last July. We were expecting that for the full year we would get a little bit of margin expansion, and that's what we're still expecting.

Okay. Thank you. And just to clarify with regards to your comments, Ivan, around Nigeria, you're building in some caution there. Is that embedded in to your margin expectations for the full year, i.e., if we were to see naira devaluation? Are you building in some flexibility for that at this stage, or is it incremental if we do see that move on the ground?

No, we're not -- I'd say we haven't in terms of our FX outlook. If you get another dramatic devaluation, I think it will impact the FX impact on the Company. But I'd say, operationally, we're geared to assume that the environment will get more difficult. But we haven't -- if the naira dropped another 50% it's going to have an impact. So that's not really built into our projections.

But I was talking about the things we can do on the ground to really ensure we are managing imports versus domestic, managing our cash exposures, etc. We're taking all those actions strongly.

Perfect. Fully understood. Thank you.

Trevor Stirling, Bernstein.

Three questions from my side. First one, Ivan, what do you think the impact's going to be of the US wholesaler consolidation? We've seen two massive deals in recent months; does that have any impact, and particularly when it comes to renegotiating NGG, given -- do you think there'll be other, let's say, more power on the other side of the table?

Second [impact] is you mentioned that the impact of the retention model on sales in North America is about 3%. If I try to estimate impact on operating profit would I be right to think it's probably about 5%, given how much -- how profitable Ciroc is, or roughly GBP40 million hit to operating profit?

And the third question is could you just give us a little bit more color on the bonus accrual, the increased bonus accrual; and particularly, which aspects of improved performance or different performance has triggered that bonus accrual?

Sure. Let me deal with the first two, and I'll ask Kathy to come back on the bonus accruals.

Trevor, the US wholesaler consolidation, the way I look at is what it's doing is it's driving greater efficiency into the system. As you know, and what you've seen with the combination of Charmer and Wirtz and Southern and Glazer, part of their business rationale, and the business model of what they're moving to, is to create and drive more efficiency. And I view that as a positive, right, in supply chains, and sales forces, and technology investments, and all of that.

As it relates to our competitive edge in our route to market in the United States, we obviously are constantly looking at widening our edge against other suppliers. And part of what we have in our arrangements with -- as you know, we work with both these combined houses.

Charmer, Wirtz are our partners in New York and Chicago, in other markets; and Southern and Glazer will now be with us in California, Texas, Florida, and many other states as well. So we've done -- we continue to do work with them, and have made some changes on sales structures; on teams; on information systems; on running more efficiency in supply chains; on better data coming back.

One of the big [trusts] that Deirdre and the team are driving is getting far closer to reading consumer trends and anticipating them, and spending our money more wisely, both in trade spend and in marketing spend.

Now, competitors, you've seen some of our competitors have consolidated all their operations with one wholesaler. I fully expect competitors to try to play catch up, but I'm confident we will keep taking our edge further. Because there's a lot of improvement still to be made in our route to market. We're putting a lot more focus on the on-trade, and in this Activation Army concept, which is all around building brands at a grassroots level.

I see the name of the game really in execution through the route to market being very much around creating consumer pull and consumer engagements with our brands. And with our scale position, I expect that we will do that better than anyone else.

On Ciroc, it has had a big impact. I'm just looking to see the -- net sales was 3%, because of the reduction. The impact on profits, I haven't calculated.

Yes. And so if you look out to the second half, one of the things that we pointed to and saw is we obviously reduced marketing on Ciroc in the first half as well, because we had less innovation this year relative to last year. That's not going to be the case in the second half. And so we wouldn't expect to see, I'd say, a big overall impact on our margins in the second half in North America coming from the difference we're seeing in year over year and sequential in Ciroc.

And then, I'll take on, I think, the last question that you mentioned was just about bonus accrual, and the big difference year over year. What that is really being driven by is where the Company was last year.

So you're accruing your bonus, at any given point in time, based on what your full-year outlook is kind of relative to what your planned targets were. And at this point last year, what the Company was staring at, at that point in time, didn't suggest that it was going to meet its plan, and it accrued appropriately.

If you look at where we're at this year, I would describe this first half as very much in line with our expectations. We've, basically, put up on the board pretty much exactly what we expected, and we're accruing bonuses in line with that.

Thank you very much, indeed.

Thanks, Trevor.

Chris Pitcher, Redburn.

A couple of questions from me. Specific to the Crown Royal business in the US, can you give us a feel for what the total depletions now for Crown Royal Regal Apple are? Is it around a 1 million case brand? And what the plans are with the Northern Harvest Rye, given the fact it's won several plaudits, whether that's enough to keep the Crown Royal franchise going well.

Then secondly, can you -- you talked positively about the outlook in India, but can you give us some feel for what your contingency plans for the GST plans at the moment?

And then thirdly, on the maturing stock situation, can you say specifically what scotch stocks did, because, obviously, there will have been some stock through divestments and so forth? Were scotch stocks stable to up slightly in the half? Thank you.

Chris, sure, I'll take the first two on Crown and India; I'll ask Kathy to cover scotch inventory.

Crown Royal overall, Regal Apple continues to do very well. The dynamic we're seeing right now is base Ground Royal is roughly flat. And in H1 we had a 16% overall depletion growth. And Regal Apple is about 600,000 cases of depletion. So, as you say, it's about a 1 million case business, which is fantastic.

What we're seeing from a consumer standpoint is it's -- most of it is incremental. There's very little cannibalization. There's some, but most of it is drawing new consumers in to the franchise. It has strong on-premise help; it's drunk in shops and cocktails. And it's -- we see the equity measures on Crown Royal improving. And Regal Apple is, clearly, a big piece of it.

Northern Harvest Rye, which is fantastic to be -- to get the accolade of Best Whiskey in the World, it's in the early stages. We ran out of it in December, in Canada. The Canadians were very proud.

And in the US, we've got more effort behind it, so I expect that to pick up. I don't expect it to be anywhere near the scale of Regal Apple, but it would be nice to build a good premium additional business. And the team has got that as one of the H2 initiatives, building Northern Harvest Rye. Just the pipeline and distribution build should give us some nice growth as well.

On India GST, clearly, we are still -- the GST Bill has still not gone through. We, and the industry, are fighting very hard to get alcohol included. It's, right now, in a -- the politics in the two houses of Parliament have the Bill still under debate, and we're working very hard for inclusion.

If alcohol is excluded, we're also working very hard so that we put in place the mechanisms to recover the taxes and get the pricing flexibility.

So the entire industry is very well aligned and working this agenda strongly. It's hard to predict when GST will go through, and in what shape, but we're fully engaged on it.

Scotch?

And with regard to the last question about just maturing stock in scotch, it did come down a little bit, about roughly GBP10 million, so a little bit of movement there.

Thank you.

Andrew Stott, Bank of America Merrill Lynch.

A couple of questions. Firstly, just on Johnny Walker, I just wondered if you could just give us a feel for the trajectory through the half, and particularly the second quarter, obviously. I'm just mindful of the fact that first half last year was particularly weak at minus [12%], just wondering about your conviction around still growing in to the second half for that category globally?

Second question was just picking up on a comment, Ivan, you made earlier on a question around the exit from wine can benefit the spirits business. Could you just explain that, please? Thank you.

Sure. Firstly, on Johnny Walker, as you saw, we grew 1% in the first half. But when you go under that, the scotch and Johnny Walker is -- we feel more confident about going into the second half.

Latin America had a strong performance in scotch and Johnny Walker, I think, up about 9%, 10%. We had South East Asia, we're seeing some nice rebound in the export wholesale markets. Europe did well.

Where we've had some downsize has been China which was a deliberate strategy where we've, as I talked about earlier, backed off the -- we're not making money on that business so we've just backed off it on the deluxe and below scotch end. And then, we've got some markets in Africa where, due to the currency volatility, etc., things have slowed down.

Now, with the emerging market currency slowdowns we are trying to recover as much of the pricing as we can; in places like Brazil and Russia we're getting about half of it now. But it's still moving the price point up.

The actions we have taken on primary scotch whiskies, and you see it come through strongly in Latin America, and you'll see more of it in Asia and Africa as we move forward, is, in part, to really keep the affordability of scotch within reach in economies where currencies are devaluing. And we've had tremendous success with Black & White in Mexico, it's almost doubled its business there, it's going to be 400,000, 500,000 cases, White Horse, and in Brazil. So that piece of mainstream primary scotch is part of our answer the volatility.

But the overall feel on the category and the health, both of scotch and of Johnny Walker, is positive, and we expect to continue to do better as we go in to the second half.

On the US question, very simply, we've got a sales force of over 3,000 people, dedicated people, on our business.

Relative to its size of business, and certainly its profitability, wine took a significant amount of time. It's an intensive category to sell. And what we see now with having our sales force just focused on spirits, I expect that incremental effort that was going against wine, I'm talking about the sales forces and the distributors, to be really focused to much more on our premium core brands and spirits.

And that's a big piece of what our US team is focused on, is getting that attention on Smirnoff and Captain Morgan and Crown Royal incrementally; and you can see some of the additional emphasis we are putting on the on-premise and the Activation Army, etc., as a reflection of that.

Okay. Thank you very much.

Andrea Pistacchi, Citigroup.

I have three questions, please. Firstly, on emerging markets, I don't think you talked about the de-stocking, which is effectively particularly in South East Asia, LatAm. Is this over now, completely? And did this have any impact in this half-year?

Secondly, Ivan, going back to the point about price increases in emerging markets to recover FX, I think at the full year you flagged that scotch had become, in some instances, more competitive because some players weren't really putting through the necessary price increases. So if you could update a bit on the competitive environment, particularly in scotch in emerging markets.

My last question is on the US, where you've had, clearly, a good improvement in shipment trends for most of your brands, except Ciroc. You sounded quite confident also on the outlook. But recent Nielsen data have shown some softening in the last few months. I appreciate it's -- Nielsen only gives a partial picture of what's going on.

I'm wondering whether you could say what you -- if you've seen on the ground any sort of slight, maybe, softening in either market trends or your brands over recent months.

Sure. Thanks, Andrea. Let me take the three questions.

On emerging markets de-stocking, as we have flagged, our remaining piece of de-stocking was in South East Asia, and that was pretty much on track. It was about GBP17 million of impact in the half.

The rest of it, in South East Asia we're seeing actually a faster depletion improvement. In West LAC, we're seeing slower depletion improvement, but that we're just managing the demand signal better. But that was the main de-stocking which we had flagged that we did in South East Asia.

On how we manage pricing in scotch, I would say, we are far more rigorous and in tune with how we manage pricing relative to -- the currencies are moving so much and ensuring we get the right balance of volumes and share performance.

Now, we are the market leader in many of these markets, so we -- for example, in Russia, on deluxe standard scotch we have lost a bit of share, but we're doing far better than super deluxe scotch. And we've taken price regardless, because in the near term you've got some trade-offs where you lose a bit of share but it's the right thing to do to keep the economics and the aspiration for the category strong.

I would say we are much more disciplined and rigorous in how we're doing this in places like Brazil and South Africa and Russia, which have had the biggest currency impacts. In Brazil, our market share performance is good.

Generally speaking, our market share performance in the emerging markets on scotch has been good.

And your final point on US trends, US trends continue to be solid. We anticipate, when we look at all the data points, Nielsen, NABCA, on-premise trends, and the independent markets, we figure the US spirits market is growing at little over 4%.

The recent trends, there was a little bit of slowdown in December, but January is looking solid. I remained confident that we've got [good] sustained 4-ish-% growth happening in US spirits, and I expect that to continue. The on-trade is a little softer, it's growing about 3%. But overall, the industry is still running at about a 4%.

Okay. Thank you. Great.

Nik Oliver, UBS.

Just one question left from me. Just regarding the use of the balance sheet. With the balance sheet now looking stronger and your comments about looking to repair the dividend cover ratio, how should we think about use of cash as we move into FY17? Is it more a focus on bolt-on M&A, or could we see potential buybacks in the next fiscal year?

I think as you look at our M&A activity, we're going to continue to be inquisitive in the marketplace. But at this point, we would really expect that those transactions are going to be smaller in nature. So that will be something that we continue to look at.

Our leverage ratio has come down, and we would expect that it'll come down further. And later in the year we will be discussing with our Board, to the extent we get in a position where we've got more excess cash, what would be the appropriate uses of that excess cash.

We gave a 5% increase in the dividend, looking to basically stay there as we seek to build our dividend cover.

Okay, that's very clear. Thank you.

Sanjeet Aujla, Credit Suisse.

Can you just give us a sense of where value depletions were for the Company as a whole in H1? And is there any reason, on a full-year basis, why depletions won't equal shipments?

And also, you made some comments on the US for the second half, expecting a bit of a pickup in Diageo's performance. Do you think that's enough to get back in to market share-gain territory? And would that be sustainable thereon? Thanks.

Sure. Thanks, Sanjeet. Overall, Company depletions are running a little over 3.5% in value terms, so ahead of our reported sales, clearly. So we're in a healthy position. Depletions are running ahead of shipments as we continue to embed the sellout culture everywhere.

On US market share, I don't expect us to be growing market share in the second half. We've got catch up to do. And I'm talking about Nielsen's [tight] market share.

I think we -- through the course of this year, while we will get relative improvement, it won't be enough to get back in to growth. However, let's be very clear, our objective, and Deirdre and team's objective, is absolutely in the US to grow at least in line with the market with the portfolio we have, and the actions we are taking on the portfolio, I talked about the value brands, shoring those up more, kind of accelerating where we've got momentum, and clearly getting Smirnoff and Captain in to better shape. But I would see that really happen more in FY17.

Got it. Thanks.

Eamonn Ferry, Exane.

Just two questions from me, if I may. The first one is on Ciroc Apple. I guess, appreciate it's quite early days, but some of the data we've seen in December suggests it's got off to a very strong start. Is that something you see from your end? And what's your views on it as we look to calendar 2016, I guess, obviously, in the context of you guys lapping some pretty demanding comps on Regal Apple for the rest of the year?

And then, just a minor technical point. Just a question on slide 56, which suggests Q1 organic sales growth was slightly negative, 1.2% I think is the number. That seems a little bit at odds with the 5% to 6% growth intimated in the AGM statement at the very end of September. I guess my question is what am I missing on that one? Thank you.

Okay, let me take the first question. On Ciroc Apple, it is, Eamonn, off to a good start. We had -- actually, if you look at the NABCA numbers in December, Ciroc Apple had a very strong month, which was pretty much its month of introduction, or one or two months in. So, we are very pleased with where we started.

One of our challenges, as you know well, is predicting the trajectory, and a Ciroc flavor is not exactly the easiest thing. But I'm pleased with the change we have made in our supply chain. And our replenishment model is we're going to watch this very closely, and as we read the marketplace respond and build from there.

But we are clearly counting -- on total Ciroc trademark, we're looking at having a stronger H2 in terms of depletions performance than we did in H1.

The second one was -- I'm just trying to understand it. The AGM statement was --

I think the message at the AGM statement was volume's mid single-digits, so let's call it 4% to 6%, plus mix slightly positive, so I guess you in to a number of 5% to 6% for Q1, unless I'm misreading it.

The number in the statement, i.e., the quarterly growth, was, I think, minus 1.2%, so I guess the delta there is quite big. My question is what have I misread, have I misunderstood? What explains the delta?

No, just the phasing of the quarters and the impact of the US. It's purely the technical phasing of the two quarters last year versus this year and the move to the Ciroc comparison and the replenishment model shift. I believe that's it. But otherwise, we'll come back to you with a more detailed answer if that --

All right. Okay. Thank you very much.

Martin Deboo, Jefferies.

Two questions. First one is on USL. You've obviously talked about GST, but just looking at USL from a broader perspective, Ivan, how are you feeling about how it's going there? They seem to have posted quite a decent quarter on the top line overnight, but I haven't gone into the entrails of that, so I'd just appreciate your general feeling about USL as we stand at the moment.

I just wanted to ask again about the tail brands in the US. Given what you said about the benefits of focus from being out of wine, I just wonder, and just noting transactions in the market, like Southern Comfort going to Sazerac, whether there's anything more creative you can do in terms of getting rid of the drag of the tail brands, either exiting them totally, or putting them through a different organization, or just any thoughts on the tail brand issue in the US. Those are the two questions.

Sure. Thank you, Martin. On USL operating performance, execution against the strategy is going well. You will see in our numbers Q2 was much stronger than Q1, and I expect H2 to be stronger than H1.

The core element of our strategy is winning in prestige-and-above whisky. That's the main battleground, the real profit [pools], where, historically, USL has underperformed its key competitor. And I'm very encouraged by the actions we have taken there.

Royal Challenge is doing very well; it's been completely re-staged, product-backed marketing, and that's gone into the market and is growing 50%, 60%.

We've got a [re-staged] renovation of McDowell's No. 1 that's going in to the market. A few states have started; it will go, H2, more broadly. Feel good about that.

Signature, another brand, and Antiquity, we've got renovation plans.

So that piece of the market, the scotch whisky business, the Diageo brands on the USL platform, all doing well. So, I expect top line growth to improve in H2.

We do have a few challenges. There are some states where don't quite like our way of doing business, as we put our new practices in to place, and we are underperforming in these five states. But that's a matter of time, because we're working with them, and I fully expect those to get better as we go into next year, and beyond.

On the margin and productivity front, USL had about 3 points of gross margin improvement, and driven by a -- really driving an efficiency program very hard in the supply chain, in our procurement.

And in total, Anand Kripalu and the team have, I'd say, an end-to-end productivity agenda which is aggressive. It is on track. They're resourced to do it. And that, combined with moving the center of gravity of the portfolio up, will, over time, lead to continued margin expansion.

So, on the operating front of USL I'm feeling good. There's obviously a hell of a lot of work to do, but where the management team is strong; we've got new CFOs in place. And, indeed, you would have seen in the results that USL posted overnight that the Q2 was our last -- Diageo Q2 was strong there.

On tail brands, we've looked at this question very objectively as to the role of tail brands and should we be in them, or out? Firstly, the actions we are taking on tail brands are really, I call it putting them on auto-pilot, is getting the pricing rhythm right so that they [hold] their share of the value segment in the marketplace.

The volume is important, and it gives us advantage, both in our supply chain and manufacturing. There's overhead recovery that comes through. And the volume is important for our distributors in terms of the scale that they provide. And for the sales force, being able to sell brands across the price points, whether it's in to the off-trade, or, indeed, getting a greater share of the well in the on-trade, in our dedicated sales force that does have value.

So, historically, we allowed those brands to -- we took price. We got uncompetitive, and really what we're talking about is get more competitive. We're not talking about spending marketing against those brands, or, indeed, a lot of sales force time; it's really about getting the pricing right, and then ensuring we get more than our fair share of the value segment.

I expect the tail brands, in spirits, to continue to play an important role in our portfolio. And our distributors would also agree with that, that they are important in terms of the scale for the dedicated divisions.

Okay. Thank you.

Alex Smith, Investec.

Just a technical question on North America. I think you said, or you implied at least, that growth would have been up around 1%, to Trevor's point, if you strip out the shipping technicalities around Ciroc, but your spirits depletions are running at around 3%.

I appreciate beers a technicality, or a driver there as well, but I'm just -- it feels like your spirits depletions are still running below -- sorry, your spirit shipments are still running below your depletion rates there. If you could clarify that; and whether, for the full year, you still expect shipments and the depletions to be aligned in that market.

And then, a quick question on the emerging markets. I think you said, in aggregate, emerging market growth was around 4% for the half. But I think you said at your investor conference in Q1 sales in emerging markets were up 6%. So just wondering was caused that slowdown in the second quarter; if there's something technical there, or anything else we should be aware of.

And then finally, a question on marketing. Again, going back to your investor conference, Deirdre spoke about transforming marketing as being her number one priority there, and I think you do refer to some changes having been made in the release. I was just wondering if you could share anything on that, please. Thanks.

Sure. Firstly, on the [deplete ships], it's purely, again, the comparisons to the prior year. For the full year, to answer your question, we do anticipate ships and depletes in the US to come in line.

On the emerging markets, one of the areas that has slowed a bit has been the impact in Nigeria and in Africa. On the other hand, we have offsets where we -- India, we expect to get stronger as we get in to the second half. Latin America did well. And we've got pockets in Asia where, again, we would expect to see improvement in the second half.

And our number for emerging markets is up more like 4.5%. The number that we would have given in November was rounded, and so while there's certainly a little bit of difference there, as Ivan mentioned, it isn't as large as you originally suggested.

Sure.

Yes, not a big number.

Can I just ask what the emerging market depletion rate for the half was? I know you've given it for the US and the Group, we can probably work it out, but I was just wondering if you could give us the number.

It'll be 5-ish-%. I don't have it in front of me right now, but it will be (inaudible) --

Okay. Thank you.

US marketing, the big changes we are making are, if I just bring it to light, and I showed some of it on the webcast with what we're doing on Smirnoff and Captain Morgan, a greater level of social and digital engagement; much stronger on-premise activation and experiential; our effectiveness of what we're spending on and how it's working we are bringing, I'd say, a lot more rigor to.

And the winning with millennials, the 60 million millennials, is really at the heart of where we have changed, we call it, our next-generation marketing model. So on every brand, and in all our categories, we're really making the changes that ensure we get steady recruitment and re-recruitment on these brands.

You get a flavor, Smirnoff, the things that jump out on a brand like Smirnoff is we're really doubling down on electronic dance music and festivals, and really getting those experiential moments amplified massively.

Even on a brand like Johnnie Walker, we are scaling up mentorship in a very big way through a lot more experiential stuff on our whiskey portfolio.

Captain Morgan, it's going back to the on-premise. And on a brand like Captain Morgan, you will see less mainstream TV and more frequent social and digital engagement with the target group.

So those will be some of the -- those are some of the shifts that we're making on the marketing front.

Okay. Thanks.

Javier Gonzalez Lastra, Berenberg.

Just two quick questions. You mentioned -- or you showed on your slide number 22 of your presentation a big improvement in the performance of scotch in H1 versus FY15. I just wonder how much was that helped by the Brazil buy-in ahead of the excise duty increase? And should we expect this H1 improvement to sustain in to H2?

And my second question is a bit more broad on disposals. You've done a few of these in the past months. Is that exercise finished, or are there more non-core assets that we should expect you to dispose of?

Javier, the H1 factor, if you look at the ups and downs, yes, Brazil had a bit more pre-tax increase buy-in. But we also had de-stocking still happening in South East Asia. And we had markets in Africa that couldn't buy because of currency. So H1 is not flattered just by Brazil. In total, I'd say the scotch trend is very well balanced in terms of what you see in our overall numbers.

On -- I'm sorry, your second question?

Yes, it's on disposals.

Yes, non-core. Non-core, we are pretty much done. You never say you're done. And, of course, we look at the fringes. But I'd say the most important disposals that we wanted to make have been done in terms of wines, the non-core beer, and Gleneagles.

At the margin, we look at a few more things, but nothing of significant scale. And our focus really now is on making the core perform.

Thank you.

Okay, well, I think we're out of time. Thank you very much, everyone, for your questions, and joining the call. Those of you in the US, I know it's really early, so thank you for making it early. And let me hand you back to the operator.

Thanks, everyone. And I look forward to seeing some of you in the next few weeks.

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