Diageo Earnings Call NUGGETS: Scotch Growth Opportunities, Route to Market

On Thursday, Diageo PLC ADR (NYSE:DEO) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Scotch Growth Opportunities

Ian Shackleton – Nomura: A couple of questions. You talked quite a bit on the webcast earlier on about the growth in scotch and I wondered on how you saw the opportunities for that growth almost to accelerate with particular reference to what might happen in India with tariff reductions and where we are on that? The second question was really sort of focusing Asia and the opportunity to grow and whether you saw what was going on at APV in Asia as an opportunity or threat to some of your existing business arrangements or it a way you could actually grow going forward, do you think?

Paul Walsh – CEO: I’ll ask maybe Gilbert to come on in a moment to talk about APV. I see it as broadly neutral. I don’t see it as materially impacting our business one way or the other, but Gilbert will have his own perspective. Regarding scotch, as you saw, scotch grew 12%. A main driver of that was Johnnie Walker that grew 15% and I think there is the potential to keep those growth rates going for the foreseeable future and if you get a material tariff change in India, you probably would see some accelerations. But I think it is premature to call that tariff reduction at this point in time. Discussions continue, but as I said, I’m not expecting any fundamental change in that market in the near-term. One of the things that gives us great confidence, not only about scotch, but also around our presence in these new high growth markets, is the sheer number of emerging middle-class consumers that are reaching legal drinking age that have the awareness of our brands and have the economic wherewithal to access them. So they are coming to us and that is a wave that is going to continue and we are very well positioned because of the investments we have made particularly in the last seven or eight years to capitalize on that phenomenon. So scotch, confident on the trends we’re seeing at the moment continuing. Could accelerate if we saw material tariff reduction, but we are not calling that and could I ask maybe Gilbert to give us his perspective on APB?

Gilbert Ghostine – President, Asia Pacific: On APB, as you know, Ian, we have here a long term relationship with APB and Heineken in Asia and in South East Asia specifically across Singapore, Indonesia and Malaysia. We believe that this consolidation will strengthen the position of core businesses APB and Heineken in Asia and will be beneficial for Guinness and we don’t see any immediate changes into our business operation. We value the relationship as we have both Heineken and with APB as we see this as even bigger opportunity for the Guinness in this partnership in the future.

Route to Market

Simon Hayes – Barclays Capital Markets: Couple please if I can, first for Pau, you talked a lot in your presentation along with Deirdre with regards to the increase you’ve seen in route to market and impeding investments in 2012. How should we think about the levels of investment going into 2013? Should we expect similar levels of increases next year in those two core areas? And then secondly North America, can you talk a little bit perhaps about what drove the acceleration, any sales growth you saw in the fourth quarter. Was that perhaps innovation led, around the pouches innovation coming to market, was there any stock build we should be thinking about in relation to that? Then perhaps as an addendum to that, any recent comments on pricing that you’ve taken in the U.S. market as well?

Paul Walsh – CEO: First of all, on North America, I’ll ask Larry Schwartz to give us his perspective in a moment. But, yes, we have had another very good year on innovation. But singling out the pouch or whatever is relatively small in the overall scheme of things. We’ve had incredible performance of our high-end brands, certainly North America, but actually across the piece. It’s interesting that our reserve brand portfolio has now topped GBP1 billion in sales, up 27% in the year we just reported. And actually, that’s across the piece. Europe was up 10%. The GB was up actually also 27%. So, there are a number of factors behind our growth. Larry can speak to it specifically in a moment. Regarding to route to market, it’s interesting you’ve posed that question because we continue to invest in strengthening, in deepening our routes to market and if I can give you an example of how we accomplished a material change in Turkey with the acquisition of Mey Icki, yes, we’ve got a great brand; we also have got a great route to market. We did benefit in the first half in turkey because of course we were able to pipeline filled with our existing scotch brands. So, that certainly helped the first half and therefore first half to second half was affected by that. When we acquired Mey Icki I think our share of scotch in Turkey was in the 20s. By the time we finished this fiscal year, our market share was approaching 60% and it will go higher. That’s what you get when you get a strong market a route to market, so we continue to invest in that. Regarding AMP, we like the notion of investing modestly ahead of our sales growth with that investment very much tilted to the high growth market where see the biggest opportunity. So, you can expect that to continue, but not to the expense of margin expansion. Larry?

Larry Schwartz – President, North America: Thanks Paul. Thanks Simon. Just in terms of the performance in the fourth quarter, there was no real material difference in our business from the first half to the second half. It was pretty steady. Yes, I think the pouches added a little, all of the sudden we had a $30 million business that we didn’t have. We sold every pouch that we could make, but all the brands seemed to be performing well from the first half to the second half and there was no material stocks, so the matter of fact we actually reduced inventory on wine and spirits. In terms of route to market changes, as I said before there is only upside to our route to market changes in the U.S., so I am pleased with the changes we’ve made. We have a single point of contact across states with each of our major distributors and at the end of the day we got more financial resources and more human resources. So, we have about 20% more distributor resources dedicated to our business than we did last year and we will continue to refine it in fiscal ’13 with more financial resources and manpower.

Paul Walsh – CEO: I think it’s fair to say that we are encouraged by the trends in North America. The categories are healthy and as you can see versus category growth; our sales growth in North America is attractive. so we are gaining a bit of share on the back of that. You are also seeing the more premium brands form backup, so we have a good mix story there and we certainly don’t see any sign on that changing.