Diageo plc (DGE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. It is now 2:30 and as a quorum is present, I am delighted to declare Diageo's '22 Annual General Meeting open and to welcome you to the meeting. First, I will introduce the members of the Board. Starting on my far left is Valérie Chapoulaud-Floquet who joined the Board in January 2021. Then we have Sir John Manzoni Non-Executive Director, who joined the Board in October 2020. Next, we have Karen Blackett, Non-Executive Director, who joined the Board in June 22. Next is Melissa Bethell, Non-Executive Director, who joined the Board in June 2020. Next is Susan Kilsby, Senior Independent Director and Chairman of the Remuneration Committee. Then on my left is Tom Shropshire, our General Counsel and Company Secretary. On my far right, Lady Mendelsohn, Non-Executive Director, who joined the Board in September 2014. Next, we have Alan Stewart, Non-Executive Director and Chairman of the Audit Committee. Then we have Lavanya Chandrashekar, our Chief Financial Officer. And finally, next to me on my right is Ivan Menezes, our Chief Executive. We also have one non-executive director attending remotely, Ireena Vittal, who joined the Board in October 2020. Before we give an update on the performance over the last year, I will first explain how to submit a question on the Lumi platform, and we'll formally open the poll so that you can also begin to vote. If you are attending the meeting using the Lumi platform, and would like to ask a question, click on the message icon in the navigation bar at the top of the screen. You can type your question in the box will access ask a question at the top also of the screen. To submit your question, click on the arrow button to the right-hand side of the question box. If you prefer, you can ask a question by telephone, by following the dial-in instructions on the home page. I will now move to opening the poll. The notice of the meeting has been made available to all shareholders, and I propose to take the notice of the meeting as read. Our voting procedure today will be by way of poll, which I will call exercising the authority in our articles of association. The poll will be conducted using poll cards for those of you attending physically and using the voting functionality on the Lumi platform for those of you attending electronically. If you submitted your vote before the meeting, you do not need to complete a poll card or vote electronically unless you wish to change your vote. For those of you attending in person today, you will have been given a poll card upon registration. If you are entitled to vote as a shareholder, proxy or corporate representative, but do not have a poll card, please raise your hand. We're all in order. To complete your poll card, you should enter your full name in block capitals. Cast your votes on each separate resolution by putting across in one of the boxes marked for, against or withheld. If you are not voting your entire holding in the company's shares, please also write down the number of shares you wish to vote. Finally, please make sure that you have signed and dated your poll card, then place it in the ballot box by the doors as you leave. For those of you voting via the Lumi platform, click on the voting icon that will appear in the navigation bar at the top of the screen once the poll opens. From here, the resolutions of voting choices will be displayed. To vote, simply select the option that corresponds with how you wish to vote for, against or withheld. Once you have selected your choice, the option will change color and a confirmation message will appear to indicate your vote has been cast and received. There is no submit button. If you make a mistake or wish to change your vote, simply select the correct choice. If you wish to cancel your vote, select the cancel button. You will be able to do this at any time where the poll remains open. I now propose that each of the resolutions are set out in the notice of the meeting is put to the meeting and the poll will be formally opened. Resolutions 20 to 22 are proposed as special resolutions. Voting will remain open throughout the meeting and will close 15 minutes following the conclusion of the meeting. Before I hand over to Ivan to talk about performance, I want to share my observations on the last year. This has been a challenging year for all consumer goods categories with continuing revaluations from the COVID-19 pandemic, significant economic uncertainty and the terrible conflict in Ukraine. Our thoughts are with all those, including colleagues affected by this conflict. Despite these challenges, I am pleased that Diageo has once again delivered strong performance. Employee engagement remains high, and we continue to invest for the future to sustain the momentum in our brands and deliver a positive impact on society. On behalf of the Board, I would like to thank our employees for their hard work and commitment to the company. The focus and agility have enabled Diageo to navigate the volatility and finish the year, a stronger business. In the face of these challenges, we continue to take a long-term view of our business, our portfolio and our brands. At our Capital Markets Day on November 21, we set out on our ambition to increase our value share of total beverage alcohol market by 50% from 4% to 6% by 2030. This ambition reflects our view of total beverage alcohol as a long cycle market with attractive fundamentals including demand from a growing global middle class. Our sustained investment in brand building and the active management of our portfolio, continue to build equity and position as well to capture trends and occasions. And we are responding to our consumers' evolving taste and demands with innovation, creativity and precision in our marketing. We believe that investing in our brands even in periods of volatility is the right way to grow the long-term equity and our business. Our teams are building brands that are relevant today and which we believe consumers will choose for many years to come. From iconic names as Guinness and Johnnie Walker to innovative newcomers such as Bulleit Bourbon, Seedlip and Casamigos. I believe Diageo's culture is a key source of competitive advantage. Our entrepreneurial spirit is embedded across Diageo through an agile purpose-driven culture, which demonstrated its value in our response to the challenges of the COVID-19 pandemic. We have grown market share while supporting the industry, our customers and each other. I was delighted to see the launch of our Society 2030, Spirit of Progress, ESG targets in fiscal '21. And the decision to link 20% of the long-term incentive plan grants for all our senior leaders to performance against several of our ESG measures. I'm encouraged by the energy and progress I see in our work to deliver our 2030 goals. We expect to invest around GBP 1 billion in environmental sustainability to reduce our impact and adapt to a changing climate, including the carbonization of direct operations through biomass, bioenergy and electrification. We now have 4 Carbon neutral distilleries in Scotland and North America, and another 4 sites globally committed to achieving carbon neutrality. And we are proud that Scotland-based Alliance for Water Stewardship, which sets a global benchmark for water sustainability, awarded the International Water Stewardship Standard certification to 12 of our distilleries this year. Including our largest distillery Cameronbridge in Scotland. At Diageo, we want people who choose to drink better, not more. There is no alcoholic drink of moderation only a practice of moderation. And we are determined to provide consumers with information they need to make informed choices. Wrong Side of the Road, a hard-hitting new program to support changes in attitudes to drink driving globally has reached over 500,000 people in 24 countries since it was launched in May 2021. And SMASHED at our award-winning program focused on tackling underage drinking is now running in 26 countries and has educated more than 600,000 people in fiscal '22. DRINKiQ, a responsible drinking tool is now available in 73 countries and 23 languages, delivering early achievement of 1 of our 2030 goals. And we have made significant progress against our target to reach 1 billion people with dedicated responsible drinking messages by 2030. I'm also very proud that we continue to make progress in building a more inclusive and diverse company. 64% of Diageo's Board are female, and the percentage of female leaders globally is now 44%. Additionally, 45% our Board and 41% of leaders globally, including our executive committee, are ethnically diverse. As a designated Non-Executive Director for workforce engagement, I have very much enjoyed meeting hundreds of employees across Diageo during the year. My Board colleagues and I have been delighted to be able to come back some of these meetings, face to face again. And I'm encouraged by our employees' pride in the company and their ambition for the future. We are delighted to have welcomed 2 new board members this year, Karen Blackett, OBE, was appointed as a Non-Executive Director in June. Karen joined the Audit, Nomination and Remuneration Committee and brings 25 years of experience of the media, marketing and creative industries. She is also a strong advocate for inclusion and diversity and creating opportunities for all. And following Siobhán Moriarty’s retirement on the 30th of September 2021, Tom Shropshire formerly a Partner & Global US Practice Head at Linklaters succeeded Siobhán as a General Counsel and Company Secretary. I am pleased with the momentum and the performance delivered in fiscal '22. We have built solid foundations for future progress across the 4 areas of performance we measure: efficient growth, consistent value creation, credibility and trust, and engage people. As we look ahead, I believe that our strengths in brand building, our supply chain operations and our agile purpose-driven culture combined with the attractive fundamentals of the total beverage alcohol market give us a strong platform to realize our ambition for the future growth of Diageo even in the face of a challenging global operating environment. We have consistently show resilience in the face of volatility in recent years and proving our ability to emerge stronger in the circumstances. And we remain focused on delivering long-term value creation for all our stakeholders. Before I hand over to Ivan, I want to highlight that the recommended dividend for 2022 fiscal year was 46.82 pence per share, an increase of 5%. This brings the recommended full year dividend to 76.18 pence per share and dividend cover to 2x. We continue to target dividend cover of between 1.8 and 2.2x. Our total shareholder return was 4% this year and our 10-year annualized total shareholder return is 11% per annum. Finally, on 21st of February '22, we commenced the third phase of our return of capital program. During fiscal '22, the company purchased 61 million ordinary shares, returning GBP 2.3 billion to shareholders. Ivan, over to you.

Thank you, Javier, and hello, everyone. Thank you for joining us. I'd like to take the opportunity to review our performance during fiscal '22 and provide you with an update on trading as issued to the London Stock Exchange at 7:00 A.M. this morning. When we reported our interim results in January, we delivered strong performance in the first half of the year while navigating a very dynamic environment. In the second half, the operating environment was even more challenging with stronger headwinds from inflation, supply chain disruptions and geopolitical events. Our strong top line growth, gross margin expansion and productivity savings have enabled continued reinvestment in our brands and strategic priorities. The recommended final dividend increase of 5% reflects our continued confidence in the long-term growth of the business and our commitment to a progressive dividend policy, and total shareholder return was 4% towards the top end of our peer group. These results demonstrate that our growth algorithm is working even as the world around us is changing at pace. Throughout the last 2 years, our business and our people have shown considerable resilience. And I want to thank my nearly 28,000 colleagues from Diageo around the world. We've become a stronger company that's advancing towards our ambition to be one of the best performing, most trusted and respected consumer product companies in the world. Now while Diageo is performing extremely well, we are restless and we want to do better. I want to highlight how we have continued to build Diageo into a stronger and more agile business. And I believe we are well positioned to navigate potential headwinds, including economic uncertainty, the possibility of consumer confidence weakening, and the continuing impacts of the global pandemic. So let me start with why I believe Diageo has a long runway of exciting growth ahead. Firstly, our categories remain very attractive. Total beverage alcohol or TBA has grown at a 4.1% compound annual growth rate since 2010. Within TBA, spirits has grown materially faster, gaining 9 points of share and continuing to premiumize during this period. Going forward, we expect spirits to continue to win share from beer and wine and for the premiumization trends to continue. We're well positioned to respond to these trends and to continue to grow our business and gain market share. Last November, we set an ambition to reach 6% share of TBA by 2030, up from 4% in 2020. Based on IWSR data, we increased our TBA share to 4.6% in 2021. And we gain more share than any of our peers and twice as much as our largest international spirits competitor. More than 1/3 of our share gains came from our super premium plus portfolio. A reflection of the success of our premiumization strategy. We gained market share in all of our regions and in global travel. And we gained category share in scotch, tequila, beer, vodka, gin and Canadian whiskey. There are 5 reasons that give us confidence in the resilience of our business. First, we have a diverse geographic footprint. This, combined with an advantaged portfolio with breadth and depth across categories, creates resilience. Second, we are doubling down on our focus on the consumer to ensure we respond quickly and efficiently to shifts in consumer motivations, behaviors and occasions. We believe our deep understanding of consumers and our use of data and technology are key competitive advantages. Third, our supply chain has been thoroughly tested in the last 2 years, and has proven its resilience, agility and strength. Fourth, our leadership team has depth and experience. Our people are our strength and our success is underpinned by high levels of engagement and our advantaged culture. Finally, we're dedicated to doing business the right way and further our investment in people, sustainability and long-term growth through our ambitious Society 2030: Spirit of Progress ESG action plan, which as Javier explained in his opening remarks, we've made good progress against. I believe this foundation will enable us to navigate volatility and will drive long-term sustainable growth. Our strong performance is the result of continued investment in our brands and our business to build a bigger, stronger and more resilient organization. Over the past 5 years, we've invested approximately GBP 3.7 billion in capital expenditures including new investments in new sites in China, Mexico and Kenya. We're increasing our capacity in key categories like scotch, tequila, baijiu, U.S. whiskey and beer. We have continued our strong track record of creating value for shareholders, and we're pleased to once again offer a dividend increase of 5%. As of the end of the 30th of June of 2022, we had completed GBP 3.6 billion of our GBP 4.5 billion return of capital program through share buybacks. We expect to complete the remainder of the program by the end of fiscal '23. So to wrap up, I was very pleased with the strength and quality of our financial results for fiscal '22 to and our strategic progress. I am optimistic about our opportunities for future growth and we continue to invest for the long term. TBA is an attractive and growing category, and we have an advantaged portfolio, which we continue to actively shape. We believe our core capabilities across brand building, supply chain and culture are a competitive advantage, and we have a strong track record in ESG delivery. We continue to be confident in our strategy and our ability to deliver sustainable long-term growth and shareholder value. Before I finish, I'd like to read the trading statement that went out this morning to the London Stock Exchange. And this is my quote. "We have made a good start to fiscal '23 with organic net sales across all regions, reflecting our advantaged portfolio, our continued investment in brand building and our agile supply chain and culture. I would like to thank my colleagues for their continued creativity and drive. We expect the operating environment to remain challenging with ongoing volatility due to geopolitical uncertainty, a weakening of consumer spending power inflationary pressures and disruptions related to COVID-19. However, I am confident in the resilience of our business and our ability to navigate these headwinds while executing our strategic priorities, including our ambitious 2030 sustainable plan. We remain well positioned to deliver our medium-term guidance for fiscal '23 to '25 of organic net sales growth consistently in the range of 5% to 7% and organic operating profit growth sustainably in the range of 6% to 9%." Thank you. And Javier, I turn it back to you.

[indiscernible]

It's a good question. Do we have copies of the trading statement outside?

I don't think we have them. They are available online.

They're available online.

From this morning.

Yes.

Yes. Thank you, Ivan. I will now take questions from shareholders, proxies and corporate representatives relating to the business of the meeting. To be fair, the others, please keep your questions concise and relevant to the business of the meeting and allow others the chance to speak once your question has been answered. For those shareholders, here physically, we will be using roving microphones. [Operator Instructions] So now I will take the first question from the floor. If you have a question, please raise your poll card, and we'll invite you to speak, please would you stand, clearly state your name and if relevant, the name of the organization you represent before asking your question. Sir? You will get a microphone.

Concerning climate change down there. Do you have what you call an environmental report, which I can read on the website on the Diageo website. Do you have a separate report?

Indeed, we do. You will find it. You will find a section in the annual report and a more comprehensive one separately as well. Actually it has 119 pages, if you want. We take the matter very seriously I think we have a written question. A written question.

The written question. I don't think I have a copy of.

Okay, right. Very good. Thank you. Anyone else on the floor? Yes, sir.

My question is about diversity. There's a lot of great stuff in the reports about gender and ethnicity, which is really good to hear. I'm particularly interested in neurodiversity, having just finished a PhD in this subject. And I think it's something that companies need to do a lot more about. And you mentioned it once with one word. I just wonder whether you can tell me anything more about what you're doing around neurodiversity?

We mentioned the 2 biggest drivers, if you know from a worldwide point of view, but we are looking at all aspects of diversity. Whether it is cultural background, whether it is sexual orientation and whether it is as well neurodiversity or any type, if you want to for or of other conditions as well. And internally, we are starting to build as well data, if you want, from a statistical point of view. We take the matter very seriously. We think it is very important for all of us. I think we'll be a better company but at the same time, we think that we have a duty a little bit because of the privileged position we are to try to lead a little bit on the field as well. Thank you for the question. Sir?

Robin Thomsett, shareholder. Thanks for allowing me to get my feet straight. What I'm wondering is what the future holds for this coming year. We've got storms and such like, which are going to disrupt deliveries. Both in far west, far east and farther East. In Europe, of course, we've got a war, which is going to affect the Russian supplies and also the European suppliers in some ways. So I'm wondering how we're going to get with the recent loss of personnel throughout the world. We've got -- were downloaded probably with work and laboring personnel. So how is the work going to be organized to a good improvement this year -- last year, okay. Next year, doubtful. How would you for Mr. Chairman.

Look, I've -- trading statement said, there's a lot of uncertainty about the future from a geopolitical and macroeconomic point of view. And that's certainly the case for any individual for any organization, for any company. What I can say is that I think we are as well prepared as one could be. Our preparation comes from the years of investment, the way our people have grown with us and our culture, which includes flexibility and agility to change and to adapt to a situation of sudden change. And I think we've proven that with COVID-19, when the organization was able to move extraordinarily quickly to adapt to an environment of changing the way we produce that our people were laid out in the plants. The way we communicate it with our customers and the way that we communicated amongst ourselves. So in this sense of uncertainty more than bloom I would say, I think that we are very well prepared and probably better than we have ever been. The future will be what it will be notwithstanding. Thank you. Yes, sir. You'll get a microphone.

So am I now audible. Two, I've got two.

Could I have your name, if you?

Yes, of course. My name is Robert Barrison. I'm an ordinary shareholder. And I've got 2 subjects to raise. One is about marketing and the other ones about human resources and diversity, what's that. Maybe I'll -- telephone. Yes, right. If volume and price are increasing the sales value. Do you think it would be -- make more business sense to move towards the premium and super premium brands of our products and in which regions are these stronger -- strongest and which ones are growing the fastest. And the other one is human resources and diversity. I mean, I acknowledge that Diageo is a multinational. Do we have a sort of diversity program that will make for a more cohesive and happier company.

Right. Very good. I mean on the first question, the answer would be that the move to premium is everywhere and it's absolutely everywhere, and it's an strategic priority of the company. And actually, if you take a 10-year view, this business has changed materially into that direction. Obviously, purchasing power is important when you move to the most premium ends, and in this respect, probably the United States is the largest market for us at the top end of the market. And within that, probably the faster-growing categories is probably tequila, but we see that across the world, for example, in premium Scotch whiskey being a global. And it is clearly part of the enormous attractiveness of this sector and of this company. Spirits are gaining share of beer and wine. But at the same time, within spirits, there is a strong move to the premium end, which is growing significantly faster. So candidly, we've never had it better. We never had so much wind behind us. As regards the issue of inclusion and diversity, that's a matter which is global. The figures that we quoted in my opening words refer to the totality of the organization. And we are not happy by having an enormous amount of diversity in one country and not having it another. That below the average is just been work here. We want it absolutely everywhere. Thank you. Yes, sir. If you wait kindly before the microphone.

My name is Phil Clark, I'm a very happy shareholder.

I'm very happy that you're happy.

First of all, can I just congratulate the Board and the management of the company for the stunning performance in 2022, you're back to where you were pre-COVID, which is quite an achievement given everything that's happened between now and then, not only is that, but you've continued to pay the dividend and in fact, grow the dividend throughout this last few rather bleak years. And can I thank you for that. And Mrs. Clark actually thanks you for that and so do American Express. Thank you very much. Much appreciated. I do have two things that bother me though. And I would say I'm a very happy shareholder.

Right, indeed.

But two things. First of all, net borrowings have increased dramatically over the last 6 or 7 years at the end of 2017, it was GBP 8 billion and now we've nearly doubled GBP 14 billion. And this is at the time when you've been doing this GBP 6 billion or GBP 7 billion share buyback program. In fact, in 2022, net borrowings increased by GBP 2 billion, exactly the same amount as the cost of the share buyback program. Now you've talked about the uncertainties in the world, and there are many. And it's, who knows what the future holds. So the question is, in what world, can it possibly make sense to borrow money to buy back shares? That's my first question. And the second question relates -- is on Page 156 of the accounts. There's an exceptional item for writes down of the McDowell's #1 brand of nearly GBP 0.25 billion what kind of -- can you please explain to us what kind have gone wrong so badly in the last 12 months that we need to take GBP 0.25 billion write-off?

Very good. Well, thank you for the question. I think the matter of debt levels -- we don't look at them at absolute levels, but we look at relatively versus our ability to service the debt. And the criteria that we use, the main criteria that we use is the ratio of debt to EBITDA, which is the standard one in the financial markets. We have a clear policy of having a level of leverage between 2.5x and 3x. And despite the increases in dividend and the share buyback program, today, we are at the low end of that leverage level. So although it's doubled in size versus a number of years ago, so also has the size of the EBITDA of the business. The business is well capitalized. We have ample access to the credit market. The rating of the company has not changed. And in fact, when we raised money on many occasions, we get it at even more attractive rates that we would be corresponding to the rating we have. So we feel very comfortable on that point. On your second question, the main reason, the main reason for the impairment is related a little bit to the performance of the business, but more fundamentally, the calculations are based on a discounted cash flow and we use a rate, which we think is appropriate for the asset, for the risk of the asset. And we decided to increase the rate prudently, and that resulted on the impairment. I've got to say this is not a cash item at all. It's just a bookkeeping, a bookkeeping entry. But thank you for the question. Do you have a question? Would you mind reading it.

Sure. Mr. Chair, it's a question from Mr. Jonathan Southern. And his question is, was the Diageo pension fund adversely affected by the significant collapse in the gilts market last week. As apparently, many such other defined benefit funds were. And if it was, is Diageo as its sponsor willing and able to support it.

Thank you very much. Well, thanks for the question. we have 2 defined benefits in the U.K. They are both almost entirely hedged against movements in interest and rates and inflation. And the recent movements have not adversely the funding position. They are both well-funded. And as such, the trustee remains able to meet all the obligations that they pulled now from the funds. We are fully aware that Diageo has some obligation to support its pension plans, if it was required. But at this moment in time, so far, we haven't needed to do this. Thank you. Any other questions from the floor? Yes, sir?

John Delly, long-term shareholder. I inherited my Guinness shares in 1980. So you can imagine, I've been a shareholder for 1 or 2 years. One of the things that is close to my heart is when you have a diversified Board as you have -- there are 2 directors and before I say that, thank you for the dividend, by the way. As I said by. But there are 2 directors who do not have shares, which I feel that you should be actually representing us and by investing in the company showing that you have confidence in the company. Could you comment on that, please?

Yes. I mean this question I've had it before in other AGMs. There are 2 views on this matter. One like yours, which the directors should be shareholders because there is an alignment of interest, and another view, which is a very serious view that they shouldn't be because they might lose their independence. And you may be on one side or the other at the end of the day. So the policy of the company is to leave it completely free. And there are 2 schools of thought, and there are plenty of articles written about it. You're clearly I see from your question and your body language, but you are in one, others are in other. But that is the way that we have taken.

Directors get paid a lot of money to be directors.

But that's for the work. The issue on the other school of thought that you don't share is that there is a conflict of interest. If you are a shareholder in the sense of the long term versus the short term or the medium term.

In that case, you've got conflict of interest.

Look, that's a view. There's another view that there isn't. And in my case, I decided that not, but our policy is to respect that freedom. Thank you. Yes?

John Crawford, shareholder. People of our generation enjoy spirits and beer with alcohol, but a lot of the younger generation are looking for zero alcohol, beers, wines and spirits. Tell us what you're doing to address that trend with the younger generation.

Look, we market our products to adults and we're in a legal drinking age. We think it's the choice whether to drink or not to drink. The critical element for us, however, is to continue to premiumize. The market in which we work is enormous. We think of total beverage alcohol. It's all beer, all wine, all spirits. We are at the top end of it. So our growth does not necessarily come from many more drinkers coming or certainly not from people drinking more. Our growth comes from people drinking, drinking passion, and no more.

No, you don't understand my question. I'm talking about a trend of younger people requiring zero alcohol spirits. And zero alcohol beer.

That's answered that question.

What are you doing about it?

Well, we market in general to all levels. Some of them are young. Who are of legal drinking age. And we are still recruiting. Our brands are still recruiting in a strong way overall. It is true what you say, the total penetration of alcohol in the new cohorts or younger cohorts, is lower than it was before. What I'm basically saying that is baijiu is still because of the quality of these brands and the quality of its work is doing, it still has a high level of penetration within the new generations as well.

Yes. You do have zero alcohol Guinness. Don't you?