Good morning and thank you for your time today. In this webcast Deirdre and I will take you through the key points from the full year results we

Transcription

1 No script. 1

2 Good morning and thank you for your time today. In this webcast Deirdre and I will take you through the key points from the full year results we released earlier today. 2

3 This has been a tougher year. Weaker economies in the emerging markets and some market specific challenges means our regional performance has been mixed. But Diageo has responded well to those challenges. We have expanded margin, gained share and continued to invest in our brands, our markets, and our people to deliver on the long term growth opportunities of this attractive industry. This is a stronger business. Our brand portfolio of global and local leaders has unique breadth in our industry. We have 27% volume share of Impact s top 100 premium brands, with four brands; Smirnoff, Johnnie Walker, Captain Morgan and Baileys, in the top 10. We make award winning liquids and we won a further 17 top medals for excellence at the San Francisco World Spirits competition this year. We use world class marketing to ensure our brands are relevant for each generation. Our innovations consistently drive growth whether that is new to world brands like Haig Club or Orijin, or renovations such as our new White Horse packaging or our Black and White re-launch. We are extending our global footprint through, both organic growth and acquisitions. In the past three years we have made seven acquisitions investing over 4bn to strengthen our emerging market footprint. We have acquired leading local players, such as United Spirits in India; Mey Icki in Turkey and Ypióca in Brazil. In addition we have grown our emerging market business organically an average of 12% a year over the last ten years. 3

4 At the beginning of this year we laid out our long term performance ambition. It is to create one of the best performing, most trusted and respected consumer products companies in the world. It builds on everything we have achieved: geographic reach balanced between emerging and developed markets; scale with global and local brand leaders; excellence in marketing; leadership in innovation in the industry and a great team. This performance ambition is a clear call to action that has resonated across the business. Over 70% of our employees believe we are demonstrating the behaviours we need to achieve it. And it has underpinned all the changes we have made this year. 4

5 Our strategy however had not changed Our brands are at the heart of what we do. We invest in marketing and innovation to recruit and re-recruit consumers to these brands. This year we invested ahead in reserve and in emerging markets, whilst maintaining the right level of investment in developed markets. We used our scale to drive procurement savings. And in a multi media age where consumers pick up marketing messages from more and more places we expanded our reach across all these conversations. We are focusing on the effectiveness of our spend and increasingly measuring it in terms of cost per consumer reached. Creating an advantaged route to consumer is the key intervention we can make to fully realise the growth trajectory in emerging markets and gain share in developed markets. In fiscal 14, we began this work in earnest in markets which cover 4 billion in sales. These markets have detailed plans in place for change in fiscal 15 through to fiscal 17. In addition a number of quick wins were put in place this year and have already delivered incremental sales. We are transforming Diageo, creating a more agile, leaner organisation, with clearer accountability, linking actions with consequences. I believe that a culture where people know what they are responsible for and know what they must achieve will be our most powerful growth driver. People in Diageo act like owners and they either sell or help to sell. This mind set and the performance drivers we now focus on, our six must dos, will deliver our strategy. And now I am going to hand over to Deirdre who will discuss our performance this year in some more detail. 5

6 Thank you Ivan and good morning. 6

7 This has been a mixed year and a tougher one than we anticipated at the start. Economic weakness in the emerging markets contributed to a challenging overall environment. There have also been some specific issues which have impacted our top line performance: the anti extravagance measures in China, which impacted both our international and local spirits brands; the tougher consumer and competitive environment in Nigeria which we didn t read well; tax increases on Senator keg in Kenya and our decision to reduce stock levels in certain markets. But we have also seen a lot which gives us confidence. Despite lower net sales growth we have gained share, for example in scotch and in rum and extended our leadership of luxury brands. And a number of markets have delivered good performance despite weaker economies. Brazil and India for example grew double digit. Colombia and our Global Travel business grew 7% and in Turkey, where Raki s decline has stabilized, we grew 5%. In North America, US spirits continues to deliver good growth. Western Europe s performance has improved and we now have a stable top line in a region which still has challenges. It was also a year of efficient growth. We have always been good at identifying opportunities to reduce costs through structural changes but it s in the day to day spending decisions that we want to get tighter and this year we did get better. Our focus on costs drove 77 basis points of margin improvement even in a tough environment. Let s now go through this set of results in a bit more detail. 7

8 Reported net sales were significantly impacted by FX while in organic terms negative volume was offset by good price/mix. The adverse foreign exchange impact can be summarised into 3 main buckets: Nearly 50% is driven by currency weakness in emerging markets. This currency weakness has also impacted our organic growth as many consumers in these markets are facing high inflation and high interest rates which impacts their discretionary spend. While I am confident that this reduction in spend will be restored over time, given long term economic growth and rising incomes, it is still a factor in the trends we see in these markets and therefore we are not yet seeing a return to the long term growth rates we expect for the industry. 20% of the FX impact was driven by the weak US dollar and a third was driven by our decision to change the rate at which we consolidate our business in Venezuela from 9 to nearly 50 bolivars to the dollar. Given current exchange rates, next year I expect currency weakness to have a negative impact on operating profit of about 160m, mainly driven by a weak dollar. Economic slowdown has a more moderate impact on wealthy consumers, consequently our reserve brands grew double digit in every region and this was a key driver of the 2.7ppt of positive price/mix that we delivered. 8

9 Looking now at organic movements, I will start with volume Volume was down 2%, as growth from our reserve and local spirits brands was offset by a decline in beer and standard scotch. Volume of our non reserve scotch brands in emerging markets declined 7%, largely driven by destocking in West LAC and South East Asia and lower demand for imported products in Venezuela. Beer volume declined 11% mainly driven by Senator keg in Kenya and by Harp and Malta in Nigeria. Senator s performance in Kenya was impacted by the excise duty levied in October. I don t expect any material improvement here until we lap the duty increase this October and the brand will have a new base. In Nigeria our standard price points brands, Malta and Harp have declined as consumers have traded down to value price points, a smaller category for us although Dubic grew nearly 70%. In this challenging consumer environment we have reviewed our pricing strategy and I expect performance to improve in the next financial year. The volume decline in US spirits was mainly driven by the decline of Smirnoff, as we maintained our price position in an increasingly price sensitive standard vodka segment. In contrast the strong performance of our reserve brands drove volume growth. Ivan is going to share with you some great examples of our activities in reserve which are driving this growth. Our local spirits brands performed well. Growing demand for our locally produced rums in Venezuela and the success of Jebel, a sugar cane based spirit that we launched in East Africa, were the main contributors to the overall growth. In addition Ypióca is continuing to perform strongly, growing volume outside its stronghold in the Ceara state and gaining volume share. 9

10 These drivers of volume were also the main drivers of our net sales performance. Scotch in the emerging markets, as you saw on the previous slide, led to volume decline and it also impacted net sales albeit this was offset by some positive price/mix. The volume decline of Senator in Kenya and beer in Nigeria led to lower net sales. While the decline of Shui Jing Fang had little impact on our volume performance, net sales declined 78%. And US spirits, which saw weak volume performance, had positive price/mix and was a net contributor to overall net sales growth. Reserve brands performance drove volume growth and was the biggest driver of net sales growth with 9% volume growth and 14% organic net sales growth. Strong growth of local spirits as you just saw increased net sales and sales of bulk stocks were higher this year. 10

11 If we look at our growth for the full year the trends in the emerging markets were weaker in the second half, specifically in the third quarter, as the decline in scotch in South East Asia and the anti extravagance measures in China, had most impact in the third quarter. In addition US Spirits had a tough comp in the third quarter, and performance in Africa Eastern Europe and Turkey was also weaker as we faced a slow down in South Africa and Russia, and the decline of Senator keg impacted net sales growth in Kenya. Offsetting this Latin American and Caribbean saw strong growth in the third quarter driven by a softer comparison against the prior period. In Western Europe trends have been improving throughout the second half and across the region with the exception of Germany where mainstream brands such as Baileys and Smirnoff have suffered from increased pricing pressure. In Latin American and Caribbean during the fourth quarter we continued to destock in the border zone business, and Venezuela was lapping a strong comp, when it was up about 100% in the fourth quarter last year. In Africa, Eastern Europe and Turkey top line improvement in the fourth quarter is driven by better performance in Russia, Eastern Europe and Turkey. South Africa is slowing but Nigeria is slowly recovering and Tusker and Guinness are delivering good growth for EABL. Asia Pacific was also stronger in the fourth quarter driven by improved performance in most markets, while South East Asia and China, including Shui Jing Fang, remain weak. 11

12 Now on to margin. In August 2011 we shifted our focus to efficient growth: top line improvement and operating margin expansion. Prior to 2011 our costs increased as we built our footprint in the emerging markets. This additional investment mitigated the underlying margin improvement this business can deliver. But in 2011 the focus of the business was shifted to ensuring we delivered the returns from that investment. We changed our incentive schemes to focus on margin and identified 200 basis points of organic margin improvement which would be delivered over the next three years. As you can see from this slide we did what we said, delivering 77 basis points of margin improvement this year despite lower top line growth, negative country mix as the destock in West Lac and South East Asia affected two of our most profitable markets, and after absorbing the negative margin impact of the drop in profits in Shuijingfang. The biggest drivers of margin improvement have been marketing procurement savings and overhead savings. 12

13 This year we have delivered 72m of procurement savings from our total marketing spend. The single biggest driver was savings in media spend. We have consolidated our media buying agencies which, gives us more negotiating power. Savings in media were highest in high spend markets such as Western Europe and North America, but they came through in every region. In some markets savings resulted in higher margin and in some media savings were reinvested. In Western Europe, for example media savings were reinvested in the launch of Baileys Chocolat Luxe. We have been looking at the effectiveness of different point of sale materials which has generated a number of insights. We have found that posters, for example, are less effective than point of sale that goes behind the bar such as glasses. With these insights guiding our total spend, the procurement team have consolidated point of sale into global catalogues, so that items can be standardised and suppliers consolidated. Even in cases where there are ad hoc requests, these are now managed by the procurement functions in market. To give you an example in North America we generated 2m of savings by consolidating our point of sale purchases into our top 3 suppliers. This efficiency in point of sale as we increase our spend on the most effective materials, allows us to reallocate spend into media which offers a higher return, so it becomes a virtuous circle. 13

14 Given those procurement savings, while total spend was lower year on year, effective spend was up 4%. Looking at the spend by region now. In North America marketing spend was up 2% building on a 10% increase last year. Investment was focused on the launch of Captain Morgan White and Cîroc Amaretto, on reinvigorating Guinness and on continuing to support the growth of scotch. In Latin America and Caribbean marketing spend increased, although this was offset by a reallocation of marketing spend in Brazil to trade spend as we focused on in store visibility during the FIFA World Cup and we increased spend on new outlets as we expanded our route to consumer. Marketing spend increased slightly in Africa, Eastern Europe and Turkey but was reduced in Asia Pacific, with spend focused on the biggest opportunities. 14

15 The behavioural changes Ivan referenced earlier have changed how each department manages its budget and how each individual can now decide to do things differently to save costs. In part this change has been brought about by the delayering of the organisation. Individual team members are now closer to their budget and the outcome of the decisions they make in terms of sales and operating profit. For example as performance slowed in the year the teams were quick to react and they reviewed their initial assumptions in their 2014 plan, which for the most part was based on higher growth rates. The biggest savings they made were in staff costs. Delayering reduced the headcount but teams also looked at the way things were done, which meant not all vacancies had to be filled. Everyone is now more cost conscious on travel expenditure and we have installed a video conferencing facility across our offices to provide face to face meetings without the need to travel. Business travel now happens only when is more effective to meet in person or visit a market and in these circumstances bookings are made through our Global Hotel Program which has already delivered savings in excess of 1m. On all other indirect costs, every spend in excess of 50,000 is now reviewed by our procurement team and we have achieved savings almost everywhere, from consultancy to legal fees. This upweighted focus will continue as we now embed priority based budgeting into our planning process. 15

16 Lower operating profit, mainly FX related, was the biggest driver of lower free cash flow year on year. Working capital management was also weaker and increased on average by about 1.8 percentage points of net sales during the year. We can improve and have already made changes. As you know the executive team is rewarded on net sales, operating profit and free cash flow targets. From fiscal 15 we will replace the current free cash flow targets with an operating cash conversion target, based on cash conversation of EBITDA. With this new focus in place I expect working capital management and therefore free cash flow to improve next year. Our effective tax rate has remained broadly stable at around 18% and I expect it to be around 18% next year although I m aware of the upwards pressure on tax rates globally and the impact of the shift in our business to markets such as India where tax rates are higher. Net capex was 562m, lower than I anticipated at the beginning of the year, as we reduced some of the planned investments in scotch and beer expansion, when performance slowed, and benefited from higher than expected asset disposals. Next year I would still expect capex to be around 750m. 16

17 Net debt increased by 450m mainly as a result of our investment in USL. Despite higher net debt, interest charges for the full year decreased to 348m as the effective interest rate fell to 3.8%. Our single A credit rating allows us to access the commercial paper market and the debt capital markets at low interest rates. For example in May 2014 we issued EURO 1.7 billion of long term fixed debt at a blended rate of 1.8% as we refinanced maturing high coupon debt. I expect the effective interest rate on Diageo s debt next year will be around 3.2% as we will benefit from the full year impact of refinancing debt in fiscal 14. However the full consolidation of USL s interest charge will increase our reported interest charge. 17

18 In January we announced our global efficiency programme, taking layers out of the organisation and reducing operating costs by 200 million a year by the end of fiscal 17 although we do plan to invest 50 million of these savings in future change programmes and in investment in growth. Of the 200 million of total savings I expect we will achieve 110 million in fiscal 15 and that about 30 million of this will be reinvested in the business. The fiscal 15 savings will be about 15 to 20 million in each region, mainly staff costs, and corporate costs will reduce by about 25 million. This year we have taken a charge of 98 million in respect of this restructuring programme and I still estimate that the total charge will be about 200 million, with a similar amount of cash costs. Total charges in respect of business restructuring were 163 million this year being 98 million for the global efficiency programme, 35 million for the supply restructuring we announced in March 13 and 30 million in respect of our brewing in Ireland programme. Next year I expect this exceptional charge to be 130 million. Cash payments were 104 million this year, mainly in respect of these 3 programmes and I expect that cash costs will be about 190 million in fiscal 15. Other operating exceptionals is the charge for brand impairment of Shui Jing Fang given the impact anti extravagance measures have had on the baijiu category in China. There is deferred tax of 65m and the minority share of the post tax charge is 120m which means the net earnings impact is a write down of 79m. In fiscal 12 we made an exceptional gain on the purchase of our shares of 124m and therefore our total investment is still broadly in line with the current asset value. Exceptional non operating items is mainly a gain of 140m which resulted from the recognition of the difference between the market value and the cost of the preferred shares we subscribed for in USL. This arose when we increased our investment to 25% of USL in the first half and accounted for USL as an associate for the year. The discontinued operations are in respect of the settlement of the thalidomide litigation in Australia and New Zealand and our anticipated payments to the Thalidomide trust. 18

19 So before I hand over to Ivan I want to finish by pulling together our view of how we begin fiscal 15. FX movements will have an impact again this year, although based on current exchange rates the adverse impact is lower than in fiscal 14 at 160 million. Our debt refinancing this year will reduce our effective interest rate in fiscal 15 as it did in fiscal 14. I expect that free cash flow will be stronger next year as we focus on cash conversion measures across the business. Our global efficiency programme will reduce our cost base by about 110 million in fiscal 15 and I expect 80 million of these cost savings will fall to the bottom line and drive margin improvement. Volatility in the emerging markets is moderating but there are political uncertainties in some markets. We still expect the decline in Baijiu to stabilize by the end of the calander year although destocking in South East Asia will continue into fiscal 15. Western Europe is now stable which is a big achievement for the team. We will have to continue to manage the decline in Southern Europe and Ireland but we have the right strategy in place and Western Europe is now structured to capture growth in other markets and maintain a stable business. Despite some weaker consumer trends we see in the market, our business in North America will continue to grow, given our route to consumer and strength in innovation together with the programmes we are putting in place to improve the performance of our premium core brands. We expect to continue to grow share and drive strong growth in reserve in all markets. Taken together therefore we do see top line growth improving next year, although growth will still be lower than the long term average growth rate for this business. This business is a stronger business. We remain confident in its potential especially the growth prospects of the emerging markets supported as they are by favourable demographics and rising incomes. And our strategy to drive growth is unchanged, as Ivan will now show you. 19

20 Thank you Deirdre. 20

21 I m now going to briefly talk about our regional performance and then, in more detail about our must dos. As I said in my introduction, our regional performance has been mixed, and some of our markets have faced challenges this year. But the in market teams have responded well to manage challenges, and deliver opportunities. As you know our focus is now on our 21 markets and while we have reduced the regional structures significantly this year we still group the 21 markets into five regions to allow for regional heads, our presidents, to focus on achieving the six must dos by markets. So I am going to talk about our 21 markets under those 5 regional headings. 21

22 North America, our biggest and most profitable region, continued to deliver top line growth and margin expansion. Although overall performance has been solid, the three markets had a mixed performance. US Spirits and Wines grew 5%, Canada 1% and Diageo Guinness USA was down 7%. Category performance ranged from great performance in tequila, up 34%, to weakness in vodka down 1% as Smirnoff declined 2% in the US. In large part these variances were driven by the uneven nature of the economic recovery in North America. Consumers of average and below incomes are still under pressure and as a consequence, total spirits market growth has slowed, driven by standard and value price points. We have been more cautious on price which accounted for only one percentage point of the overall four percentage points of price/mix in North America. Reserve once again delivered double digit growth driven by Johnnie Walker, Bulleit and our latest Cîroc innovation Cîroc Amaretto, as wealthier consumers have benefited most from the economic recovery Innovation drives brand equity and recruites new consumers to our brands. We lead on innovation in the US and this year we had a 48% value share of the top 10 new innovations in the market. Our margins expanded again. Over 300 basis points in two years driven by a team who have continually revisited their business model. Acting like owners. 22

23 Our business in North America is the engine of our growth and I have spoken before about the demographic and social change which underpins that. But it bears repeating. The number of legal purchasing age consumers is increasing and society is becoming more multi-cultural. Both drive a continued shift to spirits. 23

24 Although Western Europe remains challenging, performance was much stronger this year. The economies have improved but share gains, for example on Smirnoff in Great Britain; Tanqueray in Spain, and Captain Morgan in both GB and Germany have also contributed to the improvement in performance. In addition reserve is now nearly 10% of the business in Western Europe and net sales grew 15% this year driven by malts, Cîroc, Zacapa and Johnnie Walker. And we had some good success in innovation with the launch of Baileys Chocolat Luxe, and Smirnoff Gold, as well as pouches and premix. The pace of our route to consumer work in Western Europe has increased. It is about efficiency with each sales person calling on more outlets and getting a bigger order from each call. About effectiveness, focusing our sales resources on the biggest opportunities. And it is about expansion with bigger field sales teams. Sales related costs increased this year in Western Europe but they were offset by supply chain savings and we have almost 20 basis points of margin improvement overall. In fiscal 15 we will increase our sales teams by 130 and increase on trade coverage by 50% but I again expect that the Western European team will take out cost in other areas to more than cover this increased investment. The performance in Western Europe, given the challenges in the macro environment there, is one the team can be proud of. 24

25 Across Africa, Eastern Europe and Turkey performance has been very mixed. Africa had flat net sales given Nigeria s weak performance, Eastern Europe was weaker, but up 2% and Turkey grew 5%. We made share gains across a number of markets including in scotch and rum in Russia, in whiskey in South Africa and vodka in Turkey. Once again we saw strong growth in reserve across the region. Net sales were up 26%, driven by Johnnie Walker Blue and malts up almost 30%. Zacapa was up 50% and Cîroc more than doubled. An impressive performance. We developed formats and brands to meet new consumer occasions, such as the launch of Orijin a new local spirit and ready to drink brand in Nigeria. And, as in Western Europe, we invested significantly in our route to consumer. This region has five wave one markets, more than the other regions. Pilot programmes in Russia, Ghana, Nigeria, Kenya and South Africa are done and changes have already been made, which will drive sales in fiscal 15. Operating margin was down slightly, but it was a reasonable result as procurement savings offset margin decline in Nigeria. 25

26 Despite volatility in the region Latin America and Caribbean delivered good top line growth. We are increasing our share of the growing emerging middle class consumption occasion as we expand our portfolio, especially in vodka, cachaça and RTDs. Scotch was down 3% as currency movements and a weaker demand impacted wholesalers and distributors in the border zones areas and the destocking which we began in the first half continued in the second but it is now almost complete. As in the other markets, reserve performance continued to be strong with net sales up 14% driven by Johnnie Walker, Buchanan s and Cîroc. Innovation once again grew strongly, as we introduced smaller and more affordable formats of our value and standard brands. And despite negative market mix, from weakness in West LAC and Mexico, operating margin for the region improved by 18 basis points driven by strong price/mix, and their focus on overhead costs. 26

27 Top line performance in Asia Pacific was impacted by a weaker trading environment in the region but it was the effect of the anti extravagance measures in China and a 20% net sales fall in South East Asia which drove the overall decline. Outside of China scotch grew and Diageo s leadership in scotch in Asia increased with growth in duty free, Korea, Taiwan, India and Japan. In addition Diageo gained share in scotch in China. Once again reserve grew double digit led by the strength of our malts portfolio and Johnnie Walker Blue which benefited from the Johnnie Walker Blue Label and Dunhill partnership. This is a great example of the growth we are getting in Asia as we focus innovation on the super and ultra premium segments. The loss in Shuijingfang and negative mix from the 30% decline in scotch in South East Asia reduced overall margin in Asia Pacific despite margin improvement in other markets. 27

28 I am going to move now to our must dos. Each market is focused on the must dos which are most relevant to driving their growth. For example, in US Spirits, premium core, reserve and innovation are the key must dos. In Western Europe, it s route to consumer, premium core and reserve. In Nigeria and Ghana, there is a huge push on route to consumer. In Brazil and Mexico, route to consumer is also a priority alongside premium core. And in China and Korea, it s premium core, route to consumer and reserve, where the Johnnie Walker houses are leading our efforts and delivering great results. And in every market, focus on cost and on talent is vital. Let me take you through where we stand against each of them. 28

29 Starting with our focus to strengthen and accelerate our premium core brands. I am going to talk about four of ours biggest brand which are nearly a third of our business. Let s look at each one. 29

30 Guinness performance has been weaker this year, in part due to structural softness in Great Britain and Ireland and a tough market in Nigeria and Ghana. Guinness in Africa has been revitalised with new packaging and advertising and performance is already improving in Nigeria. In Western Europe Guinness brand equity has been weaker over the past few years. We now need to underpin its premium credentials and recruit the next generation of Guinness consumers. We believe that Guinness performance can be improved through a more consistent global positioning which will allow us to execute better in each market. So we have shifted our marketing approach to a global position for the first time ever on the brand. Made of More. A beer made of more for people who are made of more. One example of that is our campaign featuring Sapeurs which you see here. The advertisement is a very simple celebration of human spirit and character, regardless of the circumstances. It has had nearly 3.5 million views on YouTube and over 1.5 million consumers have looked at the documentary about Sapeurs which is online. Let s take a look at it. 30

31 In the US Guinness performance was weaker but mostly driven by Black Lager. The core brand was down about 3% a position we can improve on through better execution in the on trade and as we build the brand for the next generation. The Basketball campaign which was launched in the US and then globally. It had over 20 million views on YouTube and we have built on this with Empty Chair in the US. Deliberately launched on the 4 th of July, it had 1.8 million views through YouTube, facebook and twitter and it was broadcast to 27 million viewers during the world cup final, causing Guinness to trend on Twitter in seven different television markets. The ad had 152 media placements creating over 35 million impressions, including great coverage from magazines such as Forbes and Adweek. Here it is. 31

32 It has been really well received. 32

33 Reaching that next generation of consumers is happening in outlet as well. In Korea we launched an in-venue Guinness pop up for the on trade. A dispenser with a 15 litre keg inside that lets consumers create their own Guinness surge. In the outlets, promotional information is on the table and there are staff on hand to explain the 6 steps to a perfect pint. It has delighted our customers who have seen sales nearly double and almost three quarters of consumers surveyed said they would revisit those outlets during the promotion. 33

34 Smirnoff is the category leader. A bigger brand than tequila globally. But it is in a segment which has been challenged and its performance reflects that. Smirnoff is in most bars in its biggest markets and is the right drink for most occasions. We need to take that fact and work with it and that is what we have done in our new campaign. Smirnoff is exclusively for everybody. A simple confident message which we will support with great new packaging and increased focus from our distributor sales teams in the US. Here is one of the spots running in the US. 34

35 No script. 35

36 Moving now to Baileys. In its two biggest markets, Western Europe and the US, Baileys over indexes in older consumer groups. It s a trend that has been increasing year on year as we haven t been appealing to the next generation of consumers. But in the on trade, Baileys has a broad distribution accross age groups so we need to focus on that. Our new campaign highlights stylish drinks for the on trade and it has tested very well in the US. It has already had a positive impact on brand equity and trial amongst year olds and we are now rolling it out. 36

37 In emerging markets, we are broadening the Baileys footprint by putting more focus on recruitment which is improving both brand equity and trial, with sales in Asia up double digit. In China Baileys was up nearly 20%. Our activity is focused on women s groups which in China are particularly popular as with the one child policy girls don t have sisters so the concept of sisterhood is very powerful. This year the team in China broke 100 thousand cases and can see their way to making Baileys a million case brand there. 37

38 And my last example Captain Morgan. Captain Morgan is very strong brand, with room to grow through expansion to new markets. Net sales were up 6% in the US, in large part driven by the Captain s expansion into white rum. Captain Morgan consumers are very loyal with a great affinity for the brand, but 20% of their rum consumption comes from white rum. So as our campaign says White Rum has a New Captain. With the success of the Captain in the US, we know we have growth drivers that work and we are leveraging them globally. Expansion into new markets has driven significant net sales growth outside the US with particularly strong performance in Russia and Eastern Europe, where net sales were up 27%. In Western Europe, we re building the brand starting in the on trade. We are using the tried and tested Keys to Adventure programme from the US, recruiting a new generation of European Captain consumers. We re launching it at scale and this year most countries in Western Europe saw double digit growth. 38

39 Growth in premium core, as for all brands, is about sustaining the brand across the generations. It is about keeping the brand relevant and ensuring that consumers believe that this is the brand for them. We have taken too much price on Guinness in the last few years and we have to support that price with great new packaging and brand messages as we are now doing, especially in Africa. We have to remind Smirnoff consumers what a great liquid this is and we have to make our scale count so that consumers know that this is a big brand because it is a great brand. Baileys future could be built solely on the growth we can achieve by taking it to new markets but we want to do more and reclaim the brand for a new generation of consumers in the developed markets. Our on trade activations and brand building tie ups such as the Baileys Prize for Fiction will do this. And Captain Morgan is the example of what can be achieved when marketing, innovation and expansion into new markets comes together. An 11 million case brand growing net sales 6%. 39

40 The performance of our reserve brands shows what can be achieved when we focus. For me it reinforces why clarity of goals is so important. And reserve remains one of our 6 must dos because we can build on what we have achieved and win in reserve in every market. Diageo is the leading international luxury spirits player. This year we extended our leadership across the whole segment broadening our lead from 20 basis points to 200. We are now the experts in selling luxury spirits brands. Our growth has been driven by: Bulleit In scotch by Johnnie Walker Blue and Gold and by Lagavulin and Oban In vodka, by Cîroc While we are not the leader in tequila, our strong performance of Don Julio meant we gained share from the leader. And with our acquisition of DeLéon, we intend to accelerate this strong share performance. We lost share in gin but the team have their response ready building on the craft trend in gin and with our unique and authentic recipes in the Charles Tanqueray recipe book. Key to driving growth of reserve has been our World Class programme, launched in 2009 as a visible way to find the best bartenders in the world and build advocacy for our brands. We have expanded it to reach consumers directly, through books on cocktail making, travel guides and a television series featuring the contest which has been shown in over 100 countries reaching 30 million viewers. This year the global final has returned to Great Britain and we are highlighting Scotland s history of blending and London s contemporary cocktail culture. 40

41 Turning now to innovation. Our strategy on innovation is unchanged: building our brands; reaching new consumers and new consumer occasions and launching new brands for totally new opportunities. To capture the mainstream spirits opportunity in Nigeria we launched Origin Bitters. Produced in one of our cube manufacturing facilities, the brand was so successful we re adding another line to increase capacity for it. In East Africa we re using Jebel Gold to reach value-conscious consumers. Accelerating the launch of the brand helped offset some of the weakness on Senator keg as we rolled it out using our bespoke Senator route to consumer in Kenya. Our launch of Haig club is just getting underway. Haig Club is a single grain whisky developed in partnership with David Beckham. We believe it can help unlock the with meal occasion in China and appeal to consumers who prefer lighter whiskies and also serve as an introduction to scotch. This year we made a shift to drive fewer, bigger innovations which means more focus on execution in market. In addition, we ve simplified our innovation process. For example we have combined our North and Latin American teams. Project and technical resources have been reduced and commercial resources up-weighted to significantly improve how we launch innovations. We now have 10 projects which will be launched across both North America and LAC. And globally the innovation and supply teams have introduced a simplified approval process which has reduced average time to market for innovations by 3 weeks. 41

42 Our route to consumer programmes will be the intervention that enables Diageo to fully realise the growth trajectory in emerging markets and gain share in developed markets. Previously we referred to our route to market, but our job isn t done when our brands are in the market, it is done when our brands are in the hands of consumers. We want to create great consumer experiences and we need to work backwards from this to define the route to consumer that we need. Better consumer experiences, in more outlets, drive share gains for our brands. So how are we doing this? First, we are making sure that we are in more places and in the right places. The census and diagnostic work we have done across our wave one countries is leading the way. It identifies priority cities, areas, channels and segments where we need to be present to give us the best access to consumers. Through the work we have done to date with our ten wave 1 countries we will mobilise an additional 1,200 Diageo and distributor sales reps and will increase our outlet coverage by 140,000 outlets by the end of fiscal 15. Second it is about driving a higher rate of sales across outlets. Over the past few years we have shared some great examples of our customer collaboration work and our customer marketing programmes. Pulling this together, codifying best practice and rolling it out consistently across markets provides us with an immensely valuable toolkit and a competitive advantage. Innovation and talent are key enablers for our route to consumer programmes, in particular great leadership and better market level sales capabilities. I believe, that leveraging the work that we have done over the past few years, building a standardised set of tools and capabilities via our Diageo selling university, and the changes we are making in market, will give us best practice across consumer goods. The cultural change we are driving across the business provide further support with increased accountability across the 21 markets for selling and clear focus in the entire business that everyone sells or helps to sell. 42

43 Deirdre has already spoken to you about the global efficiency restructuring we announced in January. And she also gave you examples of the improvements we see across the whole organisation as people make better decisions about cost. I think our progress here demonstrates people acting like owners and I have seen some great examples: In Brazil, they changed the mobile phone provider with a saving of 44%. In North America, spend on the Bulleit Visitor Centre was reduced by 80% as a new team with direct accountability got rid of consultants and external project management and reused old buildings instead of building new. In Mexico, our General Manager noticed parking spaces we were paying for were not used because they were for sales people who were almost always out of the office. He cancelled half of the leases and saved $125 thousand a year. In Spain, moving from fixed to variable warehousing and reducing stocks generated savings of nearly a half a million euros. In Russia and Eastern Europe strip stamping and back labelling was moved from Scotland and Ireland to our warehousing site in Estonia saving 1.4 million and at the same time, by being closer to the market, increased flexibility and service levels to our customers. We also collected additional backup documentation from customers, which allowed us to claim back 1.2m in VAT on advertising materials which we then re-invested in our brands. In Turkey, by moving from milling to peeling the aniseed used for Yeni Raki we saved 113 tons of aniseed and realised a 300 thousand cost saving. These are great examples of people acting like owners. 43

44 As you can see delivery of our sixth must do, our talent agenda, is key to delivery of the other five must dos. We have to have the right people in the right roles. And we have made significant changes this year to achieve that. We have removed most of the regional organisation leaving a small group to support the regional presidents as they look to drive the 6 must dos in every market. We have made significant changes to our senior leadership roles and 20% of the roles have either been taken out or new people have been appointed to the role. Above market headcount has been reduced by 17% and we have reduced the direct reports to the exec team by nearly 10%. Next year each regional president will have talent as one of their business objectives. And the change which I take most pride in is that 40% of the Diageo Executive committee are women. 44

45 Before I end let me sum up. We have made progress in delivering our strategy this year even in a tougher environment. While our regional performance has been mixed, overall we have gained share, invested in our brands, our route to consumer and our people, and expanded our margins. We now have a leaner organisation with the markets at its core and the behaviours we now look for in ourselves and in our colleagues are those which will deliver our performance ambition. We start the new year in good shape. As Deirdre said we don t expect to see an immediate rebound in the emerging markets but some of our headwinds will reduce and top line growth will improve. Diageo is now a stronger business in an attractive category and the opportunity for us to realise our potential and deliver our performance ambition is an exciting one. Thank you. 45

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