Diageo - H2 2023 (Q&A)

Transcript

Debra Crew (CEO)

Good morning, thank you for joining our preliminary results call for fiscal 2023. I'm Debra Crew, CEO of Diageo. Fiscal 2023 is the first time I'm presenting results as the CEO of Diageo. I was appointed in early June, taking over from our much loved and respected former CEO, Sir Ivan Menezes. I hope you have had a chance to read our fiscal 2023 results press release and watch our presentation on diageo.com. I'm pleased to share that we delivered a strong performance in fiscal 2023, organic net sales growth of 6.5% and organic operating profit growth of 7%. Both are within our medium-term guidance. We expanded organic operating margin by 15 basis points in a challenging cost environment while continuing to invest in the business.

Our culture of everyday efficiency and strong pipeline of productivity initiatives drove GBP 450 million of savings in fiscal 2023, is fueling sustained investment in brand building and future growth. Our business is now 35% bigger on a constant net sales value basis compared to fiscal 2019. Globally, we have gained or held share in 70% of total net sales values in our measured markets in fiscal 2023, I'm comfortable with overall inventory levels at the end of fiscal 2023, both globally and in the U.S. market. Looking ahead to fiscal 2024, I expect operating environment challenges to persist with continued cost pressure and ongoing geopolitical and macroeconomic uncertainty. We expect organic net sales growth and organic operating profit growth in fiscal 2024 to improve from the second half of fiscal 2023 accelerate gradually through fiscal 2024.

Over the medium term, we expect to consistently grow organic net sales between 5%-7% and deliver sustainable organic operating profit growth in the range of 6%-9%. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If you choose to withdraw a question, please press star followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today goes to Celine Pannuti of J.P. Morgan. Celine, please go ahead. Your line is open.

Celine Pannuti (Managing Director and Head of European Consumer Staples Equity Research)

Good morning, everyone. Good morning, Debra. Thanks for taking my question. My first question would be on the outlook that you just spelled out. If I think about the top line, you talk about macro uncertainties. Can you talk about the U.S. market more specifically, what kind of underlying market growth you've seen so far, and what are you baking as you look into the next 12 months? If it would be as well, if you could tell us about how volumes and price mix have been shaping up in this market and how you intend to gain share there. My second question is on the gross margin. You talk about cost pressure challenges.

Can you talk about what kind of cost pressure you still expect to see in 2024? I saw that your gross margin were under pressure in 2023. Can you talk about the potential for upside in 2024, especially we heard that agave costs are also coming down. If you could put all this together in order to understand the moving parts for gross margin in 2024. Thank you.

Debra Crew (CEO)

Thanks, Celine. I'll take the first one on the U.S. market, then Lavanya, if you can take the second one on gross margins. Look, on the U.S. market, as we talked about in the presentation, the fiscal 2023 results, it's, you know, from a NSV, it's really a story about the supply chain normalization. The underlying consumer, which I think is, is really kind of getting to your point, the underlying consumer, we're actually seeing a lot of resilience. If, if you step back and you look at the industry, from an industry perspective, we are seeing it return to kind of mid-single digits, which we had projected it would, and we are seeing that, that it is. We're pleased to see that that is, is getting better over time.

You know, from a fundamentals, we still feel very good. The spirits industry is still gaining from beer and wine, which we feel very good about as well. We're still premiumizing as an industry. What's driving this growth is really at the super premium plus price point. That's really driving, frankly, almost all the growth. We do see at the luxury end, some moderation of growth there, but that's a very small part of our portfolio. We also see, if you look at mainstream and below, that's really where you're seeing a lot of the pressure. We are seeing consumers do kind of smart shopping. Fortunately for us, we've got a broad portfolio across a range of price points. We're feeling like we can navigate that as we go forward. You asked about gaining share.

I think what happened, you know, if you take a look at what happened to us this year, there's really two places where we, we have not performed the way we have wanted to. First on RTD, which we talked about during the presentation. You know, this is a segment, it's the fastest growing segment right now of spirits. You know, in this emerging area, the last couple of years, we were out early with it, and we, and we performed quite well, and we're gaining share. This year, our innovation has not hit at the same rate, but we know what we need to do, and we feel like we've got the, the, you know, the right pipeline going forward on that. I will also add...

This is an area of spirits that's largely sourcing from, people are trading up from seltzers and from malted beverages. We see that going forward really as an opportunity. The second area is on Crown. Crown is, you know, while we did gain share in Canadian whisky, we did not gain share of total beverage alcohol with Crown. That's a big brand. It's important for us. Once again, this is a brand that was really impacted. One of the places we had the most shortages was on Crown. It's also the area where from a supply chain normalization, the results that you see on Crown from a net sales, actually, our depletions and consumption is much better than what that shows on there.

That being said, we still think we have opportunity with Crown. We're now able to innovate on the brand, so that will come through the year. We've also got some really strong marketing plans as well, coming back. Those are really the two share hotspots. I will add, though, we have a lot of, of really great performance in share as well with tequila. We're feeling good also that we won category share in Scotch and in American Whiskey. Bulleit's having a great year. you know, overall, we feel like we've got still the tools in the portfolio to do it. We just need to get back on our, our innovation game in a couple of areas. Lavanya-

Lavanya Chandrashekar (CFO)

Yes.

Debra Crew (CEO)

You wanna take on the gross margin question?

Lavanya Chandrashekar (CFO)

Sure. Thanks, Debra. Celine, on cost pressures that we're seeing in fiscal 2023, we saw inflation pick up from, like, the high single digits all the way to the low double digits. The single biggest exposure we have from a cost perspective is energy costs. That impacts us through the entire supply chain, all the way from cereal pricing that's impacted by, you know, the cost of fertilizers going up, through to glass, and, you know, logistics. Our own distillation costs also have a high exposure to energy. That's what we've seen happen. Now, as we go into fiscal 2024, what we're seeing on inflation is, it is moderating, not necessarily coming down, but moderating.

I'll, I'll come back and talk in a minute about agave specifically, but we have multiple levers to help offset inflation. We have premiumization is a good driver of margin because premium products tend to be. The more premium products tend to have higher margins. Revenue Growth Management is another area that we use to help offset inflation, with both in terms of headline pricing, but also trade spend optimization, managing mix. Productivity. I'm really proud of the work we've done from a productivity perspective this year, where productivity picked up from historic average of about GBP 400 million a year to about GBP 450 million a year.

As well as volume growth, I mean, spirits volumes were flat this year, but if you kind of exclude the impact of the lapping of the repipelines in the U.S., spirits volume would have been up 1%. All of this helps us to offset inflation. Coming back to your question very specifically about agave, we are seeing agave prices moderate again. We are, you know, there's two things that I'd say about this. One is, more than half of our tequila is aged liquid. There's a phenomenon here, where the benefits of agave prices coming down will be a little more delayed on our portfolio because of that aging.

The other thing I'd say is that we have a mixed model to how we procure agave. I mean, we produce some of it ourselves. We grow some of it ourselves, so it's owned. We contract with farmers to grow on our behalf, we buy some on the spot market. All of these do play into what we expect to see with agave prices. If you look at planting data that the Mexican government puts out, you know, we do expect, you know, supply to increase over the next few years. With that, prices should be coming down.

Celine Pannuti (Managing Director and Head of European Consumer Staples Equity Research)

Thank you. We got time.

Operator (participant)

Thank you. The next question go to Trevor Stirling of Bernstein. Trevor, please go ahead. Your line is open.

Trevor Stirling (Senior Analyst)

Thank you very much. Big question, Debra, Lavanya, is concerning guidance. Great that you reiterated the medium-term guidance, but I'm trying to get a sense of where fiscal year 2024 would fit into that. If fiscal year 2023 ended on 3% in the second half, if the first half of fiscal 2024 should be a little bit better because you don't have the Baijiu, Fang destocking and the comps from the U.S. a little bit easier, so that might be edging towards 4%. The second half of fiscal 2024, you lapse that Shui Jing Fang comp, so that should be better. Second half, as you say, should be better than the first. That has me somewhere around the low end of the medium-term guidance. I appreciate you're not gonna give a number today. Is that the right way directly to think about things?

Debra Crew (CEO)

Lavanya, you want to address this?

Lavanya Chandrashekar (CFO)

Yes, sure. So Trevor, I mean, like, I, I'll start by kind of reiterating what you just ended on, which is that we are not giving in-year guidance. Maybe stepping back a minute, you know, the reason we don't give in-year guidance is because we run the business for the medium to long term, and, you know, there's, there's still quite a lot of volatility out there in the marketplace. You know, we're, you know, we're going to do what's right for the business. And we're gonna continue to invest in the business. We see substantial resilience in, in the consumer and the category, as Debra laid out, and we are very confident about our medium-term guidance of 5%-7% on the top line and operating profit growing slightly ahead at 6%-9%.

Now, having said that, you know, what, what we wanted to do was to be as helpful as possible for the short term in-year guidance. We just wanted to point out, the fact that, you know, this year has continued to be a lumpy year. Fiscal 2023 has continued to be a lumpy year, as the last two years have been. Just from a lapping perspective, the comps are easier on the second half of the year than, for fiscal 2024, than they will be in the first half of the year. I'll leave it at that.

You know, we are focused on, on making sure that we drive the business in the right way, that we gain share of total beverage alcohol across markets, that we drive the productivity that we need to be driving to continue to reinvest in A&P behind our brands.

Trevor Stirling (Senior Analyst)

Thank you very much, Lavanya. If I could ask just one follow-up: The one region where it seemed to have the biggest swing in growth rates between H1 and H2 was LATAM, from sort of roughly 20% growth in the first half to a small decline in the second half. Maybe just comment a little bit on what drove that big deceleration in Latin America.

Debra Crew (CEO)

Yeah, I'll go ahead and, and, and take that, and then, Lavanya, if you wanna add anything to it. You know, certainly we, we were impacted by timing. If you think about the live events that were going to happen in the quite early in the second half, you know, things like Carnival in Brazil, et cetera, we did have certainly some shipment timing that, that landed in half one or half two, that certainly did impact. We do continue to see a, you know, a more, a more sensitive environment for consumer pricing, in Latin America. I do think. Look, we, you know, overall, we, we still feel very good about our performance in Latin America.

Remember, this is a business that, that is 70% bigger than what it was, you know, prior to going into, to COVID. We've, we've clipped along, even considering, this, this year with, with some shipment timing things happening. You know, it's still a 15% CAGR. Pretty incredible and also really nice, you know, margin, growth as well. I think the margins have doubled. I'm looking at Lavanya, and she is nodding.

Lavanya Chandrashekar (CFO)

Yeah.

Debra Crew (CEO)

The margins have doubled in Latin America, during that time. You know, we still feel good about the overall health there, we are still seeing premiumization, from the consumer, in, in Latin America, albeit, you know, it certainly is, you know, an environment where consumers are, are kind of more sensitive to price.

Trevor Stirling (Senior Analyst)

Thank you very much, Debra.

Operator (participant)

Thank you. The next question goes to Edward Mundy of Jefferies. Edward, please go ahead. Your line is open.

Edward Mundy (Managing Director and Senior Research Analyst)

Morning, Debra. Morning, Lavanya. I've got a couple of questions on tequila, please. The first is on, in the U.S. The first is on Don Julio and Casamigos, which saw a bit of a moderation, you know, in the second half. It looks like Casamigos sales were sort of flattish and Don Julio down to the sort of low single digit after quite the quite strong first half. Are you able to sort of provide a bit more color as to sort of why that happened? Is the first question. The second is, you know, you've got some great, you know, tools to read the consumer, you know, put Radar on the part. You've got great social listening tools.

Are you seeing any evidence of down trading from sort of the premium and towards the more mainstream level? Is the second question. The third question is about the international opportunity, you know, for tequila. I think you mentioned it, it drove 10% of European growth. I know, which market are you really seeing it within Europe, and which are the other markets outside of Europe and the US, where you're starting to see some early, early signs of tequila adoption?

Debra Crew (CEO)

Yeah, I'll, I'll, I'll take that, Ed. So I think, look, starting with Don Julio and Casamigos, you know, in the U.S., I mean, remember, this is a bit of a law of large numbers in many ways, because certainly we're still seeing very strong growth on both brands. You know, and look, super premium tequila has always been growing as well. What, what you really see within tequila is you see super premium tequila, and you see kind of what we would call ultra, ultra-premium tequila. Take it from a, kind of a $40 range up to a $100 range. That is all growing very fast, and that is really what's driving the growth.

At the lower end, kind of the, the more mixto tequila, that is not growing as fast, and that has been pretty priced, much more price sensitive and promotion sensitive. Then at the luxury end, I mentioned this earlier, at the luxury end, we are seeing moderating of growth there. That's not surprising to us. We always have known that, that a lot of that is, is aspirational consumption. Still growing, but just not at the same rate. We're still feeling very good about Don Julio and Casamigos. I think, when you look at sort of the second half versus the, the first half, I do think there's quite a bit of, of noise in that data.

We've got, you know, a lot of on-premise, which is not in track, is really where a lot of the tequila growth is still growing quite strongly. You know, we feel really good. Of course, we do have some innovation for the first time ever coming on Casamigos. We know that that's gonna be exciting for, for consumers to see some new innovation. You mentioned Demand Radar. Yes, we, we are closely, and we are using all of these tools. We're just not seeing things go from premium to mainstream. Like I said, you certainly are seeing some heat in kind of that, that super premium plus tequila as well as ultra, but we're not seeing kind of a premium to mainstream, you know, slide really anywhere.

On international tequila, you know, look, I mean, we, we see this across multiple kind of big cities, that high energy occasion. You know, this is really where, particularly 1942, we also are seeing from a global, from a tourism standpoint, and a lot of these big tourist hot spots, we're seeing, you know, great growth. You think about like Southern Europe, for us, Greece, you know, that's Italy, Spain. You know, I, I don't know if you've had a Paloma yet, Ed, but, if you haven't, I think on the cocktail side, we're really seeing internationally, things like the Paloma cocktail, really driving a lot of excitement for us.

Edward Mundy (Managing Director and Senior Research Analyst)

Very good. Thanks, Debra.

Operator (participant)

Thank you. The next question goes to Sanjeet Aujla of Credit Suisse. Sanjeet, please go ahead your line is open.

Sanjeet Aujla (Senior Analyst)

Hi, Debra, Lavanya. Two from me, please. You, you very helpfully gave us a bit of context on your your U.S. distributor levels, but can you just talk about the the retailer inventory situation as you see it? Against that backdrop, would you expect depletions and shipments for your U.S. spirits business to, to be more closely aligned in fiscal 2024?

Debra Crew (CEO)

Yeah, I'll take the, the, the first one, and then, Lavanya, if you want to talk about-

Lavanya Chandrashekar (CFO)

Yes.

Debra Crew (CEO)

the depletions and ships. You know, on retailer-wise, I mean, you know, we certainly did see a difference in depletions in the second half versus what we were seeing in the track channels on NielsenIQ and NABCA. You know, that being said, that, you know, a lot of that, that's fairly noisy data as well, because if you think about last year's environment, last year, there were a lot of price increases sort of coming in. For retailers, it would have been a very smart decision to sort of buy early and, and once again, creating this lumpy data. We keep talking about lumpy data, it would have created that within the retailer inventory levels as well. Look, we took price increases last year.

We took big ones in the spring, and we also took another one on August first. You know, that, that might explain some lumps, it certainly within our, our data. You know, at this point, I wouldn't signal really anything else on, on what we're, we're seeing on, on retailer kind of inventory levels other than that. Lavanya?

Lavanya Chandrashekar (CFO)

Yeah. So, Sanjeet, depletions and ships, look, as we laid out, we ended fiscal 2023 with very healthy levels of distributor inventory back to pre-COVID levels. We are, we're very comfortable with where those inventory levels ended. If you go back and look at history, like even before COVID, there was always small variations between depletes and ships. I mean, it's never a perfect science. We run the business from a sell-out, with the sell-out culture, really paying more attention to depletions. You know, I would expect minor ups and downs to continue to exist as they did in the past. Although I'd say that versus the last couple of years, I mean, things have normalized here going forward. I think, that's, that's probably the best read we have today.

Sanjeet Aujla (Senior Analyst)

Thanks for that. Just one quick follow-up on, just coming back to U.S. tequila. When we look at NielsenIQ and NABCA, it does seem like your share within the category has slowed a little bit. Can you just give us a little bit of context behind that and how you see that evolving over the next 12 months?

Debra Crew (CEO)

Yeah, I think, look, we, we have led, you know, pricing within, within the tequila industry, we are looking out for the long-term health of, you know, of tequila. We're not gonna chase any more share than, than what we, we kind of think is, is a sustainable share within that. Like I said, we feel overall very good about both brands and the health of both brands. We have always had higher shares on the aged variants of tequila, those continue to perform very, very well with consumers, a little less promotional driven versus Blanco.

Sanjeet Aujla (Senior Analyst)

Great. Thank you.

Operator (participant)

Thank you. The next question goes to Simon Hales of Citi. Simon, please go ahead, your line is open.

Simon Hales (Managing Director and Senior Equity Analyst)

Brilliant. Thank you. Morning, Deborah. Morning, Lavanya. Can I just sort of go back to the commentary on inventory levels? I mean, Deborah, you talked about you're comfortable globally with where inventory levels are sitting at the end of the year. I think it's in Latin America, you referenced in the statement there was a little bit of inventory normalization in the second half of the year. That obviously explains some of that slowdown in organic sales growth. That sort of Trevor referenced in his question. Is that the stocking, if you like, in Latin America, now complete? That's my first question. Is there anything else in other regions outside the U.S. we should be aware of as we go into sort of H1?

Debra Crew (CEO)

Yeah. I think, look, we do feel comfortable overall. We do have, you know, there are a couple places. One of them you mentioned, you know, in, within Latin America, Brazil, still is sitting, you know, higher than usual inventory. Outside of that, you know, Latin America, I think largely, you know, I'll just reiterate, overall, we feel good. You know, every once in a while, you'll get in a market, you know, a little bit of extra inventory, and mostly because you know, returning to live events for COVID, we were expecting big things there. While it materialized, just didn't materialize to the level of which the team originally thought. Once again, we feel great about our Brazilian business. It's going really strong.

You know, by the way, the other thing, just to mention on, on Brazil, it is a long supply chain because it's mostly for us, a Scotch market. You know, it is the type of thing where you have to plan these things months in advance. Like I said, the team there is quite confident that this is inventory that they can move. It's great inventory. You know, I, I, I wouldn't say anything probably beyond that.

Simon Hales (Managing Director and Senior Equity Analyst)

Okay, that, that's very helpful. Secondly, can I just come back to, to the, the U.S. market in a sort of more generally? I mean, you, you referenced in your presentation, you know, the fact that you under index as a business in RTDs. Clearly, there's a lot of pre-prepared cocktail growth in the U.S. that you haven't got access to at the moment. When you look at the size of the addressable market for you in the U.S. at the moment, given that you underplay in the RTD area, what do you think the growth rate is really of the U.S. market on a go-forward basis?

Debra Crew (CEO)

Yeah, I mean, I'll, you know, I'll start with saying, I actually, we, we're a pretty decent player in RTDs. It's just the spirit-based RTDs. If you think back, we've been in the Smirnoff Ice business for 20 years. And actually, Smirnoff Ice continues to be a great, and has nice, growth rate continuously through that. You know, there are times where it has been, you know, bigger and smaller, but we do know how to run that, that RTD business. We really don't play much in seltzers outside of, we've got Lone River, but, you know, that's a very specific kind of agave, you know, kind of background seltzer. That. You know, we do have a broad portfolio, and we do see that moving up into spirits.

I think what we have said is that we want to play selectively. We want to play where it's premium. We want to play where it will grow the category. We want to play where it will, will ultimately help our brands. When you think about, you know, LDA Plus kind of coming in to, to TBA today, you know, for them to come in through an RTD spirit, that, that just leads them right into cocktails, which is right into where, where we want to play. We also have some very nice other convenience plays that we're very excited about. Things like our Bulleit Ready to Serve, which is a really high quality, you know, Old Fashioneds in Manhattan. These really high quality serves, and we're feeling really great about that innovation.

We broadly think that convenience is important, and we can play in it. We are just gonna play in it at the premium end. The good news is, is the consumer is premiumizing. They are coming out from seltzers and from FMBs into RTD kind of spirits. You know, people are developing this taste for better quality in this space, and that is, that is right on the bull's eye for where we wanna play. You know, as far as. Look, it is still a small part of overall TBA. I think, you know, even taking into account, I think that, you know, beer, you know, kind of what's in the beer space, the beyond beer space, you know, it is still a, a smaller player. You know, we look at this, we're a total TBA player.

You know, we're not, we're not trying to, to carve up shares into too many different segments.

Simon Hales (Managing Director and Senior Equity Analyst)

Understood. If I could just squeeze in one quick final one. You delivered GBP 450 million worth of productivity savings in 2023. How do we think about the size of that savings opportunity in 2024? Clearly, you've got the final year of productivity program benefits and maybe some early benefits coming from the supply chain agility program. Should we expect to see more than GBP 450 million of benefits this year?

Debra Crew (CEO)

Lavanya, you want to go?

Lavanya Chandrashekar (CFO)

Yeah. Thanks, Debra. Yeah, no, we're, look, very proud of the work that the, that the entire organization has done on driving productivity in fiscal 2023, up from our historic levels of about GBP 400 million to GBP 450 million, as you said. Going forward, look, I do expect that we will achieve and overachieve on the GBP 1.2 billion of productivity that, that we guided to two years ago. This is our third and last year of that program. You know, for us, productivity is very much something that we work on across the board. The supply agility program will be in addition to the GBP 1.2 billion of productivity that we had guided to.

I'd expect to see some small benefit of that starting to flow through in fiscal 2024. You know, the vast majority of that is really going to come fiscal 2025 and beyond. I don't think that's going to be a very large contributor in 2024 itself. We will continue to work on manufacturing productivity. A lot of the work that we do on sustainability drives productivity. Like the, you know, being more efficient in our usage of water and energy, you know, the decarbonization work that we have done. Leven as an example, I think, you guys saw when you were up there in Scotland, that, you know, we, we now do have the ability to run that factory partially on solar power. All of that, definitely helps contribute to productivity as well.

Simon Hales (Managing Director and Senior Equity Analyst)

That's very helpful, Lavanya. Thank you ever so much, please.

Debra Crew (CEO)

Thank you.

Operator (participant)

Thank you. The next question goes to Mitch Collett of Deutsche Bank. Mitch, please go ahead. Your line is open.

Mitch Collett (Director and Equity Research Analyst)

Morning, Debra. Morning, Lavanya. I've got three questions, please. First, just to go back to the U.S. shipments depletions inventory question again. This year, your shipment growth lagged depletions by 2 percentage points. Last year, shipment growth exceeded depletions by 300 basis points or 3 percentage points, and in F21, shipment growth exceeded depletion growth by 5 percentage points. I don't think you disclosed it in F20, but can you confirm that the absolute level in U.S. dollars of shipments matched depletions in F23, and therefore we should expect shipments and depletion growth to be broadly aligned in F24? Apologies for the long-winded first question. Second question is that you said that you gained or held share in 70% of your end markets. Can you split that into gained and held?

Then thirdly, you show that you are broadly flat in terms of market share of TBA in the U.S. I guess that means that you're losing share of spirits. Is holding share of TBA, but losing share of spirits, something you're comfortable with in the U.S.? If not, what can you do to fix that, given that you've already significantly stepped up market investment within the market? Thank you.

Debra Crew (CEO)

I think, Lavanya, if you wanna take the, the first one on the ship, deplete.

Lavanya Chandrashekar (CFO)

Yes. Yeah. Mitch, I think the in Debra's presentation today, we added a slide in that we haven't historically had in the, in our traditional results deck, but Mitch, addressing this question of distributor inventory levels, because there's been quite a bit of noise around this topic. What I point to over there is, you know, in the, because at the end of the reconciliation between ships and depletes is distributor inventory levels. Distributor inventory levels started fiscal 2023, broadly in line with historic levels and ended fiscal 2023 at a very comfortable place, very much in line with historic pre-COVID levels of inventory.

Okay, so what you had from a ships and depletions perspective, I mean, if you go back to fiscal 2020, you saw the big reduction in distributor inventory levels. We run this business very much with a sellout perspective. If you go back to June 2020, height of COVID, no one knew when markets were going to reopen, what the shipments were, what the depletions rates were going to be. we were very, very responsible in and pulled down distributor inventory levels. as it turned out, the category performed quite well, and the consumers were extremely resilient in the off trade. That last drink that was being had in the on trade came home. Cocktails were being made on Zoom calls all over the country. way more exciting to make cocktails at home than bake sourdough bread.

So that further accelerated, the, the reduction in days' inventory from a distributor's perspective. Where we ended 23, we are very comfortable with inventory levels. I expect ships and depletes to, you know, move more in line with each other, as they've historically done. There's always been minor fluctuations. I'll say that again, there will be minor fluctuations, but it's far more normalized than it has been over the last three years.

Debra Crew (CEO)

Then your, your question on this, the 70% of markets holding or gaining share. Yeah, I, you know, I would. You know, the big one that's holding share is, is the U.S., which is why we kind of drew that out also on a slide in the presentation to really talk about. Look, you know, within that being flat, absolutely, we did gain on beer, but we did lose on spirits. I think I've talked about a couple of the areas that are the hot spots that in prior years were helps for us, that this year were not. This RTD, which, you know, I've talked a little bit about our plans there.

We do have plans, but we are going to play very selectively there and really play in the right places where it, it, it most complements our business versus playing at the low, undifferentiated, you know, kind of heavily promoted area. That's not of interest to us. You know, we always measure ourselves on quality market share, and so that's really important. It's not, you know, we're, we're not interested in sort of the short-term sort of hits, and, and that. That's, you know, RTD is a, is a big part. Look, Crown, I mean, within whiskey, we're the biggest whiskey player, you know, in the U.S. Our North American whiskey portfolio is, you know, is bigger than, than rum and, and vodka combined. For Crown, it's really important for us to get that business.

You know, back in a place where we can innovate again. This was a business that we were short. We were short on liquid. We couldn't do it. Historically, if you look at things like Crown Apple, Crown Peach, this has driven a lot of incremental consumers into Crown. This is not like the vodka flavors. These flavors on Crown have really brought in new consumers in new geographies in the country. Missing out on that innovation has been a big deal for us. So to be able to get back to it, we're very excited about. You know, to your point, we have been spending on, on A&P. We're very thoughtful about how we spend that, that A&P.

We always make sure that we look at, every event that we do to make sure that we get a return for it. Within that, we feel like we do have the A&P to go, do what we need to do, and get back to a, a share winning place in TBA, sustainably.

Mitch Collett (Director and Equity Research Analyst)

Thank you.

Debra Crew (CEO)

Thanks.

Mitch Collett (Director and Equity Research Analyst)

If I could just come back to Lavanya on that slide 13. It doesn't have an axis, you don't have a scale. Could you perhaps give the days of stock, days of, days of sales inventory that it shows at the end of June? Just confirm that that's based on a prediction of 12-month forward sales.

Lavanya Chandrashekar (CFO)

I'm, I'm not gonna give a number on the days of inventory that we have. We have visibility to it on a daily basis with our largest distributors. We, we run our business, as I said, on a sellout culture, and we, and it's pretty much a replenishment model into distributors, where we, you know, it didn't happen for the last couple of years because we didn't have product, but otherwise, that's, that's how we run the business. We calculate days as a forward cover basis, and it is based on, you know, normalized category growth rate predictions. Just to add a little bit more here, we treat our review of distributor inventories, and stock and trade in general very seriously.

We have what we call the Filings Assurance Committee. Debra and I lead that. We meet three times a year, and one of the things that we review through that process is stock and trade levels. I mean, we have auditors present on that. We share the reports with the board of directors and the audit committee. This is something that we, our sellout culture is really something that we take incredibly seriously, and it's.

Debra Crew (CEO)

We've been doing that for, we've been doing that for a decade.

Lavanya Chandrashekar (CFO)

Decade. Yeah. So I, you know, I know there's all sorts of other wholesale, inventory level data out there, but that's why we wanted to provide, you know, confidence that we're running this business the right way.

Mitch Collett (Director and Equity Research Analyst)

Okay. Thank you both for taking the question.

Debra Crew (CEO)

Thank you.

Operator (participant)

Thank you. The next question goes to Andrea Pistacchi of Bank of America. Andrea, please go ahead your line is open.

Andrea Pistacchi (Managing Director, Senior Equity Research Analyst)

Thank you. Yes, I have a couple, please. On Crown Royal, you said that you're now in the position to step up innovation. Along what axis are you thinking of innovation for Crown Royal? Is it flavors? Is it limited editions or anything different? The second question is on pricing, mainly in the U.S. market. For many years, there's been little pricing in the U.S. market, but in the last 18 months, there's clearly been a lot more because of the cost pressures. Looking forward, how do you think about the balance between volume and maintaining or gaining the sort of share of TBA versus pricing and margins in the U.S. market? Lastly, if I may, on agave, going back to agave.

Agave prices coming down is clearly very beneficial to, to margins medium term, even if you're saying it may be a little delayed for you because of the aging. How, how do you think about the possibility that more and cheaper agave availability could affect the pricing environment in tequila? Is this maybe a risk, if it is a risk, more at lower price points?

Debra Crew (CEO)

I'll take the, the first one, and then, Lavanya, if you wanna...

Lavanya Chandrashekar (CFO)

Yeah

Debra Crew (CEO)

... look at the pricing and agave prices. Look, on Crown Royal, everything we do on innovation, it is about recruiting incremental consumers. This comes back to, this isn't sort of the, the, something just to drive news. This is about really bringing in, new, new consumers. On Crown, I mean, part of what's enabled us, I, I should have mentioned, we've got, you know, a good CapEx like, investment in Canada, that we've put in, in a carbon neutral distillery, that's, that's gonna enable us, to have the liquid that we need to get the growth that we need. You know, what we just didn't anticipate was the huge uptick, that COVID brought with it. Of course, with any whiskey, you have to know years in advance.

We just, you know, simply ran short. You know, that being said, like I said, it is about recruit. I'm not gonna, for competitive reasons, I'm not gonna get too into what's coming, but, promise that you'll be able to taste it when we, when we launch it. Lavanya?

Lavanya Chandrashekar (CFO)

Pricing, look, our objective on price is always, you know, to treat it as one of the multiple leverage that we have. You know, price really plays on two fronts. One is, it is definitely one of the levers that we have to offset inflation. There we also have premiumization, productivity, volume growth, these are also other levers that we have. The second is price is also a lever within the marketing mix, and it helps to, you know, drive equity of the brand, in especially in the higher price points, in the super premium kind of price points. Price sometimes is an indicator of quality as well.

Our objective on pricing is to make sure that it's very balanced, and our, you know, price in itself is not an objective for us. You know, building strong brands for the c- for the long-term future is the objective. As we do that, price is one of the things that we look at, but equally, we want to be driving premiumization, we want to be driving, volume growth. If you look at volume in the year, while our volume for the fiscal was down about a point, all of that was really a reduction in volume in Africa beer. You know, macroeconomic conditions have been tough in Africa, high, you know, inflation as well as devaluation. We run that business in an extremely responsible manner.

We took price, and we lost some volume there. Spirits volume was flat. If you adjust for the lapsing effect, spirits volume would have actually been up 1 percentage point. We, we do feel good about the balance that we have between volume, price, and mix. I do expect that the, as inflation moderates, pricing will also moderate as we go forward over here. In terms of agave prices, look, as I said before, we do expect that they will come down here in the future as supply, you know, increases. Do I see that posing a price risk? Perhaps at the lower end of the price point.

I mean, the 1 thing you have to remember is, if you go to a big retail outlet, liquor outlet in, in the U.S., like, what you'll find is a very, very long shelf of tequila products even today. There's a lot of competitors on that shelf. They've been there for a really long period of time. It's not new. Competition has always been very much a part of the tequila shelf. The brands that have done well, like our brands, Don Julio and Casamigos, have done well because they have been outstanding from a marketing perspective and outstanding at brand building. This is not a price-sensitive category in general. I mean, spirits in general is not price sensitive.

It's, it's usually, the, the total spend for an average U.S. household is still only about $360 a year. It's an infrequently shopped category. It's mostly consumed in special occasions. What you're seeing drinking or what you're seeing serving people, does say a lot about you. I don't expect that this is the, you know, agave cost coming down is going to lead to, you know, some kind of a massive price, you know, sensitive environment here.

Andrea Pistacchi (Managing Director, Senior Equity Research Analyst)

Indeed. Thanks very much.

Debra Crew (CEO)

Thank you.

Operator (participant)

Thank you. The next question goes to Sarah Simon of Morgan Stanley. Sarah, please go ahead. Your line is open.

Sarah Simon (Managing Director)

Yeah, morning. I've got two questions. First one was on marketing. You talked about more innovation coming on ready to drink and more supply coming on for Crown. How should we think about marketing as a % of revenues, I guess, globally, as we head into fiscal 2024? The second one was just back to, I apologize, back to the inventory question. You said it's based on the sort of ratio of inventory levels to what you expect in terms of daily revenues. Can you give us a sense for what kind of growth you're, you're assuming in terms of daily revenues, in terms of year-over-year growth, so we can just get a feel for what's behind that decline in the ratio? Thanks.

Debra Crew (CEO)

I'll, I'll take the first one. On... Look, on marketing, we don't, we don't move to sort of a, we're not, we're not wedded to a certain rate of return, you know, on, on marketing. We, so we do what we need to do for the business, and if something is not working, we don't spend it. You know, we're not, but we're not managing to a specific number there. We do feel like we are, you know, we do have good levels, and we have been investing in places where we see opportunity. We measure all of that marketing and where we see more opportunity, we spend it. Where we don't, or where it's not working, we move that money. You know, that's, that's kind of what I've got on that.

Lavanya, you want to take the other question?

Lavanya Chandrashekar (CFO)

I'm not going to give, sorry, guidance for, you know, what our, what our short-term, you know, growth rate assumptions are going to be for the U.S., or for any other market for, for that matter. Rest assured, you know, what we use to calculate those days forward cover, is very realistic growth rates, based on recent historic, actuals and, you know, trends. I mean, like it's, it's, well, we measure buys, we, we do all the, all the good stuff that you would expect a company that runs a, a very, you know, disciplined business, to do.

Sarah Simon (Managing Director)

Thank you. Thanks.

Operator (participant)

Thank you. The next question goes to Chris Pitcher of Rothschild & Co Redburn. Chris, please go ahead. Your line is open.

Chris Pitcher (Head of Consumer Staples Research)

Thanks very much. Good morning, Deborah, Lavanya. A couple of questions on Africa, please. You mentioned that volumes have been weak in Africa, but your performance in Nigeria certainly seems to have held up better than many of your competitors. Judging on the commentary, it looks to have been led by beer. Can you give a bit more color on what's helped your performance in Nigeria, given all the macro pressures on the consumer? More broadly, on your strategy in Africa, there's been a lot going on. You've sold entire businesses, you've sold breweries, you've increased others. Are you happy with your footprint as it is in Africa right now?

Could you share any plans you might have across the continent to help protect share, given some potential new entrants, especially in important profit pools like Kenya? Thanks.

Debra Crew (CEO)

Lavanya, if you want to take the first question, I'll take the second one.

Lavanya Chandrashekar (CFO)

Yeah. Look, I, you know, very proud of the work that the team has done in Nigeria, grew 11%. We took price. We're not the biggest player in beer in Nigeria, but we were, but, you know, Guinness is a extremely differentiated brand. And we, we, we, we did take price there and managed to hold the business. The spirits business is doing well in Nigeria as well. You know, gin, up 6% in Nigeria. You know, overall, we're quite pleased with our performance over there. You know, did I say Africa footprint is the second part of the question?

Debra Crew (CEO)

Yeah. I'll take that one. I mean, I think, look, we, you know, we are seeing, you know, kind of political and government instability, you know, in multiple markets. I am quite proud of the team and how they performed, because to your point, I think, you know, ultimately, at the end of the day, they delivered a good set of results in very difficult circumstances in several markets. What we are still seeing is sort of Guinness is doing better than a lot of local beer. We are seeing international spirits do better than a lot of local spirits. That's still a good sign for our business, and that we're still getting, you know, along with, with pricing, we are getting a good mix as well into, into the region.

I mean, look, we are, you know, you, you mentioned sort of, Cameroon. I mean, we, we try to run Guinness with a very, asset-light mentality. If there is a place where, you know, we see that somebody else can do it, more efficiently, you know, on those assets, you know, we, we look at that to make sure. We are always, you know, looking to, to, you know, optimize the business, where it makes sense. We feel very good about, what we were able to do in, in Africa this year overall, considering the circumstances.

Chris Pitcher (Head of Consumer Staples Research)

Thanks. Thank you.

Operator (participant)

Thank you. The next question goes to Laurence Whyatt of Barclays. Laurence, please go ahead. Your line is open.

Laurence Whyatt (Managing Director, Senior Equity Research Analyst)

Hi. Morning, Debra and Lavanya. Thanks very much for taking the question. A couple of geographies for me that we haven't touched on yet. Europe was one of your double-digit growth markets in the year, and I think it was the only market that accelerated in the second half. A number of markets did double-digit growth, and I was wondering, do you see any of this growth as sustainable? Is there anything in particular that was driving this level of growth this year, that you don't see repeating next year? Then secondly, India has now actually quite sustainably driven mid-teens, high teens growth. I think it was 17% this year.

Presumably as a result of disposing of a number of your lower-end brands and franchising out a number of the brands, you would expect the growth rate of India to have accelerated. Do you think this sort of mid-teens, high teens growth is now sustainable? Thank you.

Debra Crew (CEO)

Thanks, Laurence, and thanks for your question on our, some of our best performing markets here. Yeah, look, Europe had a great year. Net sales up 11%. I mean, you know, we really are seeing pretty broad scale. You know, GB is a little bit weaker, you know, on, on the spirits side, but on, you know, Guinness is, is growing double digits, super strong. Really across our Europe geography, you know, aside from the industry, we're really gaining share. You know, that's really some of the things that, that, that really helped us. We're seeing particular strength in Scotch. We're seeing premiumization. We're seeing tourism bounce back in Southern Europe. You know, our non-alc portfolio also continues to grow.

You know, we're still seeing on-trade, I think we're saying is sort of at like a 92% of pre-pandemic, so there's still maybe even a little opportunity there. So we're, we're seeing Europe mostly as a, you know, this is a, this is a really solid performance, and it, you know, it's not sort of a bunch of one-offs. So I, you know, that's really great performance out of Europe. To your point, it did accelerate in the second half. By the way, Johnnie Walker, up 28% in the market, so just really, really impressive. Guinness, up 20%. Very exciting. Look, on the India front, and Lavanya, I was gonna say... Oh, go ahead.

Lavanya Chandrashekar (CFO)

I can take that. Yeah. India, look, I think, Laurence, it's, it's been 17% growth. The premium and above grew 20%, the super premium plus grew 32%. You know, Johnnie Walker grew 34% in India, with a volume growth of 13%. We were able to take strong price in India, which is not something that we've been able to historically do on a very regular basis. The team did an excellent job of being able to get that. And within Johnnie Walker, Johnnie Walker Black, which is the core of the portfolio in India, grew 54%! I mean, this is a whiskey market, right?

I mean, unlike a lot of other emerging markets, you know, the Indian consumer does not need an introduction to whiskey, and they do not need an introduction to Johnnie Walker. I mean, it's a highly aspirational brand. The consumer in India is very resilient. Our portfolio in that premium, that super premium and above, is unmatched in India. So as I feel very confident about our prospects in India.

Debra Crew (CEO)

I do think, I'll just, I'll just add from a consumer standpoint, this is a consumer that is quite confident. We're seeing from a premiumization, you know, our mid and upper, upper prestige is growing. Scotch is growing faster than kind of the local Indian whiskey. You know, and we, and we won share. This is another one where the sustainability of this growth, you know, looks really good.

Laurence Whyatt (Managing Director, Senior Equity Research Analyst)

That's all really clear. Thank you very much.

Debra Crew (CEO)

Thank you.

Operator (participant)

Thank you. Our final question today goes to Jeff Stent of BNP Paribas. Jeff, please go ahead. Your line is open.

Jeff Stent (Head of Equity Research)

Good morning. Just a quick question, Debra Crew. You know, it's early days as CEO. You've got a CMD scheduled for November. I wonder if you could share some high-level thoughts on, you know, are there any subtleties as to how you maybe wanna sort of shift direction of Diageo? Is there anything you're thinking about accelerating or decelerating? Just any sort of high-level color you could give us would be very helpful. Thank you.

Debra Crew (CEO)

Yeah, thanks. Look, I, I'm seeing this more as an evolution than a, than a revolution at this point. I've, I've been at the company now, if you include my, my non-exec time, about four years. You know, certainly a lot of the strategy already has my, my fingerprints on it. You know, that being said, we did highlight a couple things in the presentation. You know, we are looking at taking tequila around the world. We've done that with so many brands, you know, going back all the way to Johnnie Walker. As the largest tequila company, in value already, with really being present in only a couple markets, that just feels like a big opportunity. Talking about, you know, also just continuing this juggernaut we have with Johnnie Walker.

I mean, Johnnie Walker just keeps walking. I, you know, I'm very excited about what we've got there. About a third of Johnnie Walker consumers, you know, are females. We have this brand that is able to really recruit in, you know, new users. It's over 200 years old, so it's really exciting. I, you know, I also talked about Guinness. I mean, Guinness is another one where, you know, you think about, you know, it's Ireland, and it's, it's St. Patrick's Day, and it's pubs, but we are seeing a lot of strength on Guinness across the board. Guinness grew in every region. We had big markets that had double-digit growth. We are, you know, the number 1 in on-trade in Ireland. We are, we, we're vying quite competitively in, in GB.

There are weeks that we are the number one in on-trade, and we've got a lot of innovation to include going into non-alcs. The Guinness 0.0 is off to, to an incredible start. We've invested in capacity. I really see, you know, an opportunity to, to, to continue, you know, the, the growth on these three categories alone are, are, you know, are half the business, and they're growing strongly. We feel great about that. Thank you. I do look forward to, to seeing you at our Capital Markets Day. I'm excited to, to talk more with you.

Jeff Stent (Head of Equity Research)

Thank you.

Operator (participant)

Thank you. That's all the questions we have time for today. I'll now hand back to Debra for any closing comments.

Debra Crew (CEO)

Okay, thank you for joining us today and for your interest in Diageo. I hope everyone has a lovely summer break.