Diageo plc (DGE) Earnings Call Transcript & Summary

And now we'll take our next question from Richard Withagen from Kepler Cheuvreux.

I missed the part of the call but -- so if this question has been asked, sorry about that. But I have 2 questions, Debra. First of all, you became responsible for the U.S. since July. So in what areas of the business do you plan to step up efforts and allocate more resources? And then the second question I have is on -- yes, in beverages in the U.S., a lot is going on with different growth rates in channels, different category growth rates. What do you think will be the biggest game changer in TBA in the next 5 years?

Yes. So -- and no, I haven't answered these questions, so thank you. So as far as for July and from since July and where have I kind of focused resources, I mean, a lot of this has been -- we're very focused on the here and now just given everything that we have going on. So we are trying to respond with agility across where we're seeing the opportunities. So with that said, I would say, look, we're clearly putting more effort against the off-trade and e-commerce because that's really where we're seeing the growth right now. Hopefully, you saw from the video this morning, you see we've got a portfolio that's really oriented towards some very great growth areas. So U.S. with the Canadian whisky, tequila, these are all great growing parts of our portfolio, and we're really doubling down against that momentum. And then, of course, we are continuing to -- because in the off-trade, we're seeing such tremendous results, we are using tools like EDGE, which I think we talked a little bit about in the video. Certainly, you would have heard Deirdre talked about it in the past. We're using tools like this to really make sure that we can target down to the zip code. And given COVID is creating all these different situations across the country, something like EDGE really gives us a big advantage, and we're certainly putting resources behind that. Also, you would have seen the M&A that we did on -- with Davos, bringing Aviation into the portfolio. We're very excited about that brand. So we've seen opportunities for M&A, we're definitely investing there. And then you would have also seen some of the investments that we're making in supply chain, and that's been a big piece of making sure that we've got a good, efficient sustainable supply chain to support the growth we've got. You've asked about what we see the biggest changer in total beverage alcohol in the next 5 years. We talked a little bit about things like e-commerce. That's something that with COVID -- prior to COVID, I mean, nobody even knew you could get alcohol almost online. I mean it was only 1 in 3 of the consumers knew before. I think it was less than 2%. And now you see Drizly, they're predicting things like more than 20% could be in e-commerce in the future. So you think about the opportunities that are there, that would certainly change things within the industry. Certainly, we're seeing -- I already mentioned some of the categories that we're seeing a lot of growth on. I haven't mentioned things like cocktails to-go. Hopefully, you saw in our innovation, we see a lot of opportunity there. We think there's a big opportunity to kind of drink better, and it's on-the-go occasion and so ready-to-drink occasion. So we see a lot of opportunity there as well. So hopefully, that kind of answers the questions there.

It did.

And now we'll take our next question from Edward Mundy from Jefferies.

You mentioned on e-commerce, your rate per case is 15% to 20% higher versus bricks and mortar. Is that because you're selling more premium SKU brands? Or is that because you're able to catch a greater share of the value chain? My first question. The second question is to what extent you think or you'll be willing to share what you think is your medium- to longer-term top and bottom line growth ambition for North America? And then my third question is, you worked in a number of FMCG. You've been privileged enough to be both at the nonexec level and the exec level at Diageo. What do you think are the 2 or 3 things that Diageo could do to become an even stronger business in both North America and more broadly based on your exposure to broader FMCG?

Yes. So first, on e-commerce, you're exactly right. It really is about more premium SKUs. When you think about the buyer in e-commerce is sort of the younger legally drinking age kind of consumer that is a little more urban and they are looking for higher marks in brands. So it really is about more premium SKUs kind of driving that. Look, as far as medium to longer term, I mentioned, we are very focused on kind of the here and now and really emerging stronger from this crisis because this is one of these moments that we really think consumers, if you think about your own life, you're just reassessing sort of everything. And so we think it is very important to come out of this stronger. That being said, I think Diageo North America has had a terrific story over the last 3 to kind of 4 years of just this consistent delivery. And that's certainly something that I want to build upon because I think that's really important. We do see ourselves as providing kind of outsized growth within the broader group. And so that's something that certainly, medium to longer term, I would want to continue to grow on. I've been super impressed by the tools that Diageo really have and has been building up these capabilities over the last several years, so there's been a lot of investment in. And I know looking back through prior presentations that Deirdre had talked with many of you guys about on the investments into Catalyst, into EDGE and Trax and there were all these tools. But I can tell you, it is truly impressive. And certainly, through COVID, it's been great to be able to come in and to leverage the insights there to be able to respond to the market situation and down to the zip code level. So great tool there. And I would see that once we get out of this crisis, those tools are going to continue to serve us really well. I think between the insights, the innovation, the investment into marketing, I really see our ability to be able to accelerate growth from where we've been. I see us continuing to grow share in total beverage alcohol, and I'm seeing sequential improvement in spirits. So I mean I think that's probably as far as I'll go right now about -- I mean here, we don't have any guidance out here so I'll just leave it at that. But we really do feel great about the opportunities for the business. I think I answered all...

And my third question?

Oh, yes.

In terms of the things that you think that Diageo -- I mean, it's obviously a strong business, strong brands and good execution. But are there any areas that you think -- any gaps for Diageo to close as you look across both North America and the broad business based on your exposure to other FMCG?

Yes. Look, I don't think it's a gap per se. I just think it's really leveraging the opportunity with the portfolio that we have. So really doubling down behind places in the portfolio where we have momentum. I've grown up around things that I've been kind of relentlessly focused on share. And so certainly, that's going to be a focus of mine. And I would say really getting out there with -- if you look at what's going on with the consumer right now, there's a lot going on, I think, as these really emergent spaces for spirits are quite different for us, things like gifting, things like the ready-to-drink and all these areas that I think for spirits we haven't really gotten into that so much. So I think there's a real opportunity for those to create kind of more occasions for spirits than what we've had in the past.

And now we'll take our next question from Trevor Stirling from Bernstein.

So apologies if these questions were asked before. I got bumped off the call. Two things. One, if I look at the latest NABCA data, it looks as if in NABCA at least, industry volumes are growing roughly 10%, and price/mix is running at mid-single-digit plus. Do you think that represents the broader industry? And the second question is, you understand we've talked on some of the great success stories in the portfolio at the moment, but a little bit less about Smirnoff and Captain Morgan that are still very significant brands. What do you think you can do to turn those around, but arguing maybe a little bit more tired in the lower growth part of the industry?

Yes. So you asked about NABCA data and sort of if that's more representative. I mean I think, look, and I mentioned this earlier, all of these states have a lot of different things going on. So I think that's probably about in the neighborhood of what we are seeing out there, recognizing that it can be vastly different sort of state to state. But I think in general, that's probably a good way to look at it. And on Captain and Smirnoff, because we haven't talked as much about those areas, but I will say we are seeing, certainly on our vodka portfolio, we're seeing improvement there and we're now gaining share. On the latest Nielsen, we're actually gaining share of vodka. Now granted vodka is part of overall spirits is shrinking, but it's good for us to see. Admittedly, it's mostly on those premium marks of Ketel One and Cîroc are actually driving that share growth, although Smirnoff is sequentially improving. So -- but look, I mean, vodka, we certainly have opportunities there. And I think a lot of it is around innovation. I think in the video, we did highlight some of our Smirnoff innovation that we've got coming the second half, which we're very excited about. Because I do think, with Smirnoff, it is about keeping really relevant and having some news and kind of talk value to it. And I think that's what's helped us. And if you go back and look in places where we've gained share on Smirnoff, it's usually when we've done really great innovation that connects with the consumer. And I should mention, Smirnoff -- on our Smirnoff Ice portfolio and on our malt beverage, Smirnoff is actually doing really, really well. So from a trademark perspective, we know that Smirnoff does work with that kind of younger legally drinking age consumer. We know it from the Smirnoff Ice and malt beverage portfolio. So I feel really good about Smirnoff. Captain, look, Captain is still one of the top brands in the U.S., still has really broad appeal. And actually, this year, for 2020, actually, both Smirnoff and Captain gained household penetration. And I think that's during COVID, people wanting to return back to these big brands that they're familiar with and they know. And also, Captain makes great cocktails. Great, simple cocktails, which when people are making cocktails at home, that's what they're really looking for. So I think there's more opportunity there on just focusing on the great, I'll call them, yummy cocktail because they really are. We have to make some really great simple serve, and so we know that that's the way to go there. And we are -- been looking for, you'll be seeing some new kind of look and feel to Captain in the future as well.

Our next question comes from Laurence Whyatt from Barclays.

I was wondering, the first one, just look at the cost savings that you're able to take out of the business towards the end of last fiscal year. And how many -- how much of those do you think you will be able to maintain as we emerge from the COVID situation? Secondly, on your distribution cost, we've seen quite an uptick in cost of trucking, in particular, around the U.S. I'm just wondering if either the costs are going to impact you or the availability of trucking drivers? And have there been any logistical problems on the back of that increase in trucking costs? And then finally, slightly different. Just drawing on your experience from Reynolds and as we talk to investors more and more, we're being asked about ESG-type credentials and obviously, the tobacco industry has -- is largely removed from any fund that focuses on ESG. There are a few funds that are starting to talk about alcoholic beverages in the same light. And I was wondering what you think would be the best defenses for the alcohol industry when it comes to being a force for good in the world and in the world of ESG?

Okay. So yes, I'll take the cost savings one first. So definitely, if you go back to fiscal '20, we did cut out some A&P. I talked about that earlier. So we reduced marketing by about 6%, and we had a reduction in other kind of expenses that really offset -- actually, we have lower fixed cost absorption and then we had an adverse channel mix. So that's kind of how our margins came together for fiscal '20. Clearly, without really providing a whole lot of guidance, but at the same time, I think you can think about this going forward, that some overhead savings will clearly continue as people aren't traveling this year yet. So that's one way to think about it. Our fundamentals are strong. Premiumization is a long-term trend. We are seeing volume growth that drives operating leverage, so all of these are good guys. On the negative, I would say, we do have an orientation to invest. I've talked about A&P. We definitely want to continue to strengthen that because we know that helps to drive our top line and our share growth. So hopefully, that gives you a little bit of sense for cost savings and where we're at on margins. As far as distribution, look, this is something that we're -- I mentioned earlier, there was someone who had asked about our relationship with our distributor partners. We do feel great about those relationships, and we are keeping close to make sure that we can get the loans we need and that we can get product out into retail. The industry is certainly seeing stress on supply and the costs on some of these lanes are certainly up. So we are managing through it, I would say. And I wouldn't expect sort of service interruption type of thing. We're able to deal with it. Look, as far as ESG, I mean, ESG is super important. And I actually think Diageo does a tremendous job in this area. And I think things like promoting positive drinking is really important. We take that very seriously. That's not just talk to -- that is something that we really, really do believe people should drink better, not more. And we have a lot of activity going on to make sure that we're trying to reduce the harm out there. The drunk driving, the binge drinking, the drinking under age, all of that, we make sure that we absolutely do everything we can to eliminate that because that's where you fall into the hole of having problems. So look, I think we take that really seriously. The grain-to-glass sustainability, we also take really seriously. It is one of our 6 strategic objectives along with positive drinking. And we are trying to be a force for good on inclusion and diversity as well. So you'll be hearing more from Diageo on our 2030 targets, which I think are really bold. And I think you can -- they're bold in the sense of even if you look across any other FMCG. So we're not just comparing ourselves to other players in the alcohol industry, we are really looking at goals that will set us apart across FMCG. So stay tuned for that. But yes, we do take it seriously, and we want to make sure that people know what we're going for there.

Thank you. In the interest of time, this will conclude today's Q&A session. Ms. Crew, I'd like to turn the call back to you for any additional or closing remarks.

Great. Thank you for your time today and your interest in Diageo. Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.