Good afternoon everyone and welcome back to our final presentation today. I hope the content we have shared with you today has given you deeper

Transcription

1 Good afternoon everyone and welcome back to our final presentation today. I hope the content we have shared with you today has given you deeper insight into; the natural growth opportunity our industry presents the advantaged position that Diageo enjoys How implementation of our strategy will enable us to access that opportunity in a more consistent and agile manner And how the changes we have embedded in our business and culture give us greater confidence in our ability to deliver efficient growth and long term value creation 1

2 Let me take you through what I will cover today. I will start with a brief reminder of the key financial metrics we use to track progress on the financial elements of our performance ambition. I will then update you on the progress we have made on productivity, how this is delivering cultural change within Diageo and ultimately creating the fuel for growth to reinvest in our brands. You heard Ivan reiterate our confidence in delivering our mid term guidance. I will share my thinking and why I am confident in our ability to deliver despite the volatile environment we operate in. And finally, I will update you on our cash flow performance and how we are thinking about maintaining an efficient balance sheet. 2

3 Ivan opened the day this morning, reminding you of our ambition to be one of the best performing, most trusted and respected consumer products companies in the world. He and the other speakers today have talked about the actions we have taken to deliver our strategy. I will now cover the high level measures we use to assess our progress driving efficient growth which we believe will result in strong, sustainable value creation over the long term. 3

4 You are familiar with the measures we use to track progress on efficient growth and value creation, which we highlight regularly in our financial communications. In the first half, our organic net sales growth progressed into the mid single digit range we are targeting, and our goal is to consistently deliver in that range. Our margins have been in line with expectations and we continue to expect stronger organic operating margin in the second half. Cash flow continues to be strong and delivering consistently and EPS has significantly improved somewhat helped by the devaluation of sterling. We believe that strong consistent performance on these efficient growth metrics will ultimately drive strong ROIC and TSR, and you can see we have made gains in both metrics more recently. 4

5 Over the last two years we have performed well on TSR, but our focus is on enabling strong long term returns. It is the longer term improvement in TSR compared to our peer group which will indicate that we are achieving our performance ambition. And you can see over the last ten years, Diageo has delivered strong returns to shareholders, ahead of our peer group. 5

6 Let s now move on to productivity and how we are: Delivering savings Utilizing the program to enable greater agility And providing fuel to reinvest more strongly in our brands. 6

7 Our financial productivity goals are clear: To deliver 500m of savings over the F17 to F19 period To reinvest roughly 2/3rds of the savings back into the business to drive consistent top line mid single digit growth. And to bring some of the savings to the bottom line to support 100bps of margin improvement over three years beginning this fiscal year We have established specific financial goals across five areas of spend, driven by external benchmarking both in and outside our industry as well as our own internal best in class results. To give you a sense as to where we will see the impact, we expect about 60% of the financial benefits to accrue through gross profit and 40% to impact marketing spend and overheads. However, the benefits of driving productivity go beyond these near term financial deliverables. Long term success is about embedding productivity into our culture by creating a stronger sense of personal accountability to constantly get more efficient and effective in everything we do. It also drives a focus on simplification and streamlining processes, and using better data and information to be more agile and move faster. I am really pleased with the progress we have made on the productivity programme so far. And we have been working from the start to ensure the changes we are making are sustainable. We have made good progress in each area with the pace of that progress tied to the time it takes to permanently change the way we operate and work. For example we accelerated work on in directs to deliver strongly in F17 through zero based budgeting tools we were able to deploy at this time last year. Other tools to help us better manage trade spend and improve ROIs on A&P have been deployed more recently and will give us greater benefits in F18 and beyond. We are off to a great start, and I d like to share some of the work we are doing to drive savings starting with Net Revenue Management (NRM). 7

8 Net revenue management (NRM) is all about driving net sales efficiently by optimizing how we use headline pricing, promotions and investment in trade spend. To make a step change improvement in NRM we need to transform our processes, systems, data and people capabilities to deliver great analytics in a standard format, using a common tool across the organization. This is how we will deliver a more consistent and efficient way of evaluating what we invest in price and other promotions and how we can maximise the return. Today we deliver NRM analytics in a manual and inconsistent way many times using excel spreadsheets and limited external data to attempt to model the impact on end consumer uptake. We have now codified What great NRM analytics looks like across Diageo. We have embedded this in a software tool and created training materials that will enable our commercial teams to have access to sophisticated NRM analytics. Functionality includes pricing elasticity simulators, promotional plan evaluations as well as customer profitability. We are rolling this out now in Europe and the US and will expand implementation further in F18. In South Africa we piloted the pricing elasticity module to understand the impact of proposed headline pricing changes including our ability to capture value when consumers are down trading into other Diageo products. This is expected to deliver a net sales improvement of about 13m by the end of F18. Let s move to marketing spend. 8

9 As Syl and Andrew showed you earlier today, we have made significant changes in marketing to improve our effectiveness; essentially getting our money to work harder. The changes are designed to put measurement of return on investment at the heart of every decision we make and to move more resource into the activities with stronger paybacks. This programme is delivering a capability in marketing performance measurement that is genuinely cutting edge, and will enable greater speed and agility in our decision making. As you heard, we accelerated the rollout of the new Marketing Catalyst tool. The Strategic Module has been implemented across most markets covering 80% of our A&P spend and it is playing an important role in our F18 annual planning process, providing insight to inform decisions around the allocation of A&P towards higher performing and more strategic campaigns. 9

10 In contrast to our actions around marketing effectiveness, our work on marketing efficiency is aimed at reducing the cost of marketing; simply stated, spending less money. For a number of years now we have been focussed on delivering procurement savings in this area by consolidating agencies to give us more negotiating leverage and also by improving our WOW to only use agencies to do the work where they truly add value. We have driven agency consolidation more broadly and now have only 5 lead creative agencies globally and 12 in total when you include local brands. We re also consolidating our activation agencies, a good example being in Europe where we moved from 36 to 2 pan European agencies. Overall our work on marketing spend has contributed significant benefits over the past 2 years. As you ll know from our results announcements in F16 we delivered over 80m of procurement savings and our expectation is that we will exceed that amount this fiscal year. We expect these savings to be about 6% of A&P in F17. Despite these significant savings we continue to guide that we expect A&P as a percentage of net sales to be broadly in line versus last year. So we are clearly reinvesting to increase marketing activity in the business to drive top line growth. 10

11 Moving on to Global supply. There is a lot happening here as you would expect with COGS equal to about 38% of net sales and over 50% of our operating cost base. In our global supply organisation: We are standardising best practice manufacturing processes across supply centres and markets under our operational excellence programme we are breaking down and challenging cost of goods; optimising our logistics footprint, and continuously improving our sourcing strategies. To bring this to life I will walk through a couple of the work streams. 11

12 On Make, our manufacturing excellence program, we have standardized how we operate our plants and are sharing best practice manufacturing capability with production sites across the world to increase plant utilization and reduce waste. Having developed this operational excellence framework we have already generated 20m of saving this year with more to go as we embed this globally. On Move, we have made significant reductions to the cost base over the past 3 years by standardizing our approach to analysing logistics and getting greater cost visibility. This has enabled us to consolidate warehouses and vendors, and optimize direct bulk shipments to large customers. Looking forward, we continue to see incremental opportunity and expect we can deliver ongoing savings of 2 3% in logistics cost per case annually. 12

13 We have a very disciplined process to ensure our product cost and formats are competitive and that we understand the cost/value trade offs we are making in each element of our product and package design specifications. Here are just a few examples of actions being taken across the organisation. Individually these actions are relatively small. However, across the portfolio the changes add up to real money. On Johnnie Walker sold in India, we are securing savings on cartons by sourcing and applying them locally. On Crown Royal, our work revealed the opportunity to replace a relatively expensive foil rimmed label with metallic paint at reduced cost and the same look and quality finish. This work is also important in designing innovations. In the mainstream spirit category, this approach ensures we are not over engineering the product for the price point, channel and consumer occasion we are targeting. 13

14 Next I d like to cover some of the work we are doing on organisational effectiveness. We are building organisation blueprints with a clear ambition to increase spans of control and reduce layers while increasing the proportion of our people focussed on front office activity. Through simplification and providing better access to data and information, we increase the speed of decision making, eliminate time spent simply collecting information and focus our resources on higher value added work. A key part of that is ensuring we leverage the scale and expertise of our shared service centres wherever possible. 14

15 We are leveraging LEAN concepts to simplify our processes in a big way. The approach looks at what we can eliminate, then standardise, then automate and, where appropriate, move to shared services. One example where we have made a significant improvement is in the review and redesign of our source to pay process. We started by conducting a global assessment of pain points and waste. At the beginning, our process was very manual. We had over 100 FTEs in shared services just dedicated to speaking to suppliers and dealing with issue resolution. 80% of our purchase orders were in a free text format meaning significant manual intervention was required. The outcome of the lean review is a new standard end to end process supported by our new purchase ordering system, COUPA. You can see some of the results here, including a 40% FTE reduction. Changes like this not only drive out cost, they simplify things for us and our vendors, resulting in fewer complaints. Automation is a key enabler to achieve these types of results. Let me show you a short video showing just two of many examples of how we are using automation to make our processes simpler, quicker and more efficient. 15

16 Video 16

17 Our shared service centres use automation wherever possible. And as we are standardising and centralising much of our work, these centres are accounting for an increasing proportion of our employee population. In terms of shared service maturity we are further along than most peers. Our journey in shared services started as far back as Since then we have further centralised functions and expanded our capabilities going beyond simple processing roles to include functions like external reporting, most of our treasury and controllership resources, as well as digital expertise, some tax and technical accounting roles. This means our people can grow their careers within the shared service environment, which enables us to attract and retain great talent. Over the fiscal 17 to 19 period we will be transitioning more roles in shared services which gives us labour cost arbitrage as well as improved efficiency. Currently 7% of our workforce are located in our shared service operations. Based on benchmarking we believe that puts us towards the top of our CPG peers. Looking ahead we expect this percentage to increase to above 10%. We are also optimising the location of roles within shared services. We have recently opened our fifth shared services centre in Bangalore insourcing 400 roles from external providers. We did this within 6 months of announcement, really demonstrating the speed and agility we have built in this area. 17

18 So let me turn to the last of the 5 productivity areas we are targeting; how we are tackling indirect costs. During F16 we partnered with our external advisors to benchmark cost categories both within and outside our peer group and internally across like size markets. Using this information, we set targets and established detailed plans that will move us to the top quartile in each spend category. As part of the process we appointed global and market cost category sponsors to drive consistency in approach and share learnings around the world. We used new Zero Based Budget global planning tools to develop our F17 budget from a zero starting point. Let me bring this to life for a couple of cost categories. 18

19 First, on T&E, we have set our goal to be in the top quartile of our peer group. Through zero based budgeting we scrutinized both number of trips and cost per trip. This has enabled us to reduce both, with our people really delivering a significant shift to reduce in person internal meetings, instead using video conferencing, facetime and WhatsApp to stay in close contact. The result is a 32% reduction in T&E by F19 with most of that being delivered this year. And on the use of consultants, we are on track to deliver 33% savings through zero based planning and new policies including mandatory competitive tenders. 19

20 The work we have done to embed productivity is also enabling a positive change to our culture. We are doing this by empowering our people to deliver more by raising their personal level of leadership and accountability. We have specific KPIs to track our progress that are built into our performance management systems. And we expect our people to be externally focused so they are on top of how best practices are changing in their function or market and to constantly be looking for opportunities to raise our game and be out in front of peers and the competition. We have put in significant effort to ensure we communicate what we are doing, and why it has such strong benefits for the business and our people. Our communication platforms also enhance employee engagement and cross market collaboration. Let me share some snippets from just a few of the many messages that our leaders have posted on our internal website to communicate to the broader organization. 20

21 Video 21

22 So we have made significant progress on our work on productivity. This work is underpinned by better data and use of technology and simplifying and standardizing our processes. This is significantly strengthening our people s analytic capabilities and directing resources to higher valueadded activity. These changes are not one off, they are changing our ways of working permanently. And in the process of making these changes we are developing an expectation of personal accountability for continuous improvement and faster decision making across Diageo. 22

23 So, what does this all mean for our mid term performance? 23

24 I am really excited about the possibility this work on productivity unlocks for us, especially creating the fuel to invest behind our brands, to invest in our sales force and route to market and to invest in innovation. And our people are seeing and experiencing that upside. Investment in our brands is our number one value creator, as we deliver operating margins that are amongst the highest of our peer group. As you would expect, we prioritise investments that deliver the best returns and we balance short and long term needs to ensure we see strong growth today and for many years into the future. We are confident in the work Syl and Andrew shared with you that puts measurement of ROI at the heart of every decision. As a result we are clearer on where we should increase investment to get the best returns. You saw in our results for the first half that we have now moved our organic NSV growth into the mid single digit range. In the second half of F17 A&P will grow faster than net sales and we are up weighting spend in the US. And as Ivan and Deirdre mentioned, we plan to invest further in fiscal 18 behind both US Spirits and scotch as we seek to improve our market share and sustain mid single digit organic growth. 24

25 And as you know, we are also committed to expanding our margin while delivering that consistent top line growth.. We operate in a world where volatility will be a constant factor and we expect to deliver our goals within that context. Our H1 results were a good example of us being able to deliver results in line with expectations while managing some volatility across the business. Our top line organic growth came in at 4.4% even though we were impacted by a number of unexpected one off events, such as demonetisation in India and the Thai king s passing in the second quarter. This resilience stems from our broad geographic footprint, considerable portfolio of brands cutting across many price points, and importantly our strengthened capability in reacting quickly to marketplace and consumer changes. There are a number of moving parts that will impact margins as we look forward: First price. As we have said before, pricing has been fairly muted over the past 2 years, lagging inflation. We have made up for this with positive mix. We would expect to see pricing strengthen in the mid term however in the short term we don t expect a significant positive uptick. Moving to mix, in the 1H of fiscal 17 we saw a significant upside from mix which was supported by strong growth in scotch and North American whiskey and softer performance in India and Africa. In the second half we expect to see better performance from Africa and as such we expect the positive mix impact to reduce compared to levels we saw in the first half. As we look forward to the full fiscal year we expect margin expansion overall despite muted pricing gains, our up weight of A&P in the second half and the near term challenges in India that Anand mentioned. We are confident that the strong productivity gains we are driving will enable us to improve margins by 100bps over the 3 years ended fiscal

26 Now I would like to round off this session talking a little bit about our performance on cash flow and maintaining an efficient balance sheet. 26

27 Diageo has delivered strong cash flow improvement over the past 3 years and this is reflected in our position as most improved amongst our peers on cash conversion. A focus on cash flow every day is what we expect from our business today with improving working capital efficiency as a percentage of sales over time. You can see our FCF has improved 70% over the last 2 years and we expect our positive performance to continue. 27

28 It is this every day focus on cash that is underpinning our consistent delivery and that will enable this positive performance to carry forward. This work cuts across the organisation as you would expect. On a weekly basis credit controllers and sales account managers work together to manage any arising overdue debt issues. We have supply leads tasked with ensuring inventory levels are on target and slow moving stock lines are managed carefully. And cash features strongly in regular business performance management meetings at all levels. Our planning processes incorporate targeted improvement and the detailed plans and actions to achieve our goals. As you can see from this chart, we have been consistently improving the efficient use of working capital over the past two and a half years. We are confident we continue to have opportunities to further improve, and the right actions and activities to deliver that. 28

29 Our capital structure is underpinned by our leverage policy of targeting 2.5x to 3x Adjusted Net Debt to EBITDA which broadly supports our single A minus credit rating. In terms of capital allocation, our first priority is investing in the business to drive efficient top line growth. We seek to maintain dividend cover, that is the ratio of basic EPS to dividends per share, in the range of x, and are currently below this range. We are therefore maintaining a dividend growth rate in the midsingle digits to allow cover to increase. We continue to monitor our portfolio and have recently divested non core assets such as our wine business. You heard Anand talk about how in India we are moving to the franchise model for some of our lower value brands. You also heard earlier from Ivan how we are investing in Distill Ventures which offers us an opportunity to invest in nascent brands with growth potential. In addition we continue to look for bolt on acquisitions that could enhance our portfolio. As we think about excess capital, fully funding these priorities comes first. We then look at our leverage metric and would consider that we have excess capital when we sustain leverage below our target level. We closed the first half of fiscal 17 with Adjusted Net Debt to EBITDA of 2.5x, so squarely within our target range. Once we fall below this range and believe that position is sustainable, the board would then make the decision as to whether it is appropriate to return excess capital to shareholders. 29

30 So in summary I would say that am very excited about the future for Diageo. Our first half performance and the continued progress we are making in productivity gives us confidence in delivering our mid term guidance and being on track towards the achievement of our longer term ambition to be one of the best performing, most trusted and respected global consumer product companies in the world. We are making good progress across our measures of efficient growth and value creation and are on track to deliver consistent mid single digit growth with margin improvement expected this fiscal. I hope you will agree from what you have heard today not only from me but my colleagues, that productivity is now firmly embedded in our organisation. And it is helping to strengthen our culture as our people personally embrace both the possibility and responsibility to get more efficient and effective across our business, to have better data and information to move with greater speed and to have more investment available to grow our brands. And we see further opportunities to continue to improve upon our already strong and consistent cash flow performance. 30

31 So that brings us to the end of our presentations. I just want to take a moment to wrap things up. Our ambition is clear. We participate in an attractive and growing industry. Through our broad portfolio and strong geographic presence we are well positioned to take advantage of that. You have heard from Ivan and the other presenters today how we are focused on delivering our strategy through executing our 6 priorities and as well as our near term areas of focus on Scotch, US Spirits and USL. You have also heard about the changes we have made and continue to make in creating a more efficient, effective and agile organisation, with the consumer at the heart of our business. We are pleased with the progress we have made and also restless to continue to improve. We are confident we are on track to deliver consistent mid single top line growth, 100bps of margin expansion and strong value creation over the long term. I would like to finish my remarks by thanking you all for making the time to be with us over the last two days. I hope you have found the sessions informative and now, I would like to invite my colleagues to the stage and we will take your questions. Thank you. 31

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