Diageo PLC Q2 FY2022 Earnings Call

Hello, everyone. And thank you for joining our interim results call for fiscal '22. I hope you've had a chance to read our press release and watch our presentation webcast on diageo.com. I'm very pleased with our results for the first half of fiscal '22; it builds on our strong momentum in fiscal '21 and demonstrates our world-class brand building, supply chain excellence, and agile culture. Organic net sales were up 20%. All five regions delivered double-digit growth and exceeded net sales in the first half of fiscal '19. Growth was broad-based across categories, and I was particularly pleased with the strong growth in Scotch, up 27%. The continued outperformance in tequila, up 56%, and the recovery in beer, up 22%. We also delivered a significant improvement in operating margin, up 131 basis points, while increasing our marketing spend ahead of net sales growth. And we achieved this while managing higher cost inflation and ongoing disruption from global supply chain constraints. Our advantage portfolio, combined with effective marketing, excellent commercial execution, and successful innovation, enabled us to gain or hold off-trade share in the majority of our markets. We also gained share in the on-trade as it continued to recover. We are investing in long-term growth, including production capacity, digital capabilities, and our Society 2030 goals, and we're delivering consistent returns for shareholders, increasing our interim dividend by 5% and accelerating the timeline for completion of our return of capital program to 2023. While we expect continued volatility in the near term, I'm optimistic about the growth prospects for our industry and for Diageo. We believe we are well positioned for resilience in the off-trade and further recovery in the on-trade. We expect to continue benefiting from the rapid premiumization of the spirits category and its share gains within total beverage alcohol. And our premium differentiated brand Guinness is well positioned for key growth trends in beer. I am confident in our strategy and our ability to execute strongly through the remainder of fiscal '22 and beyond. I'll now hand the call back to the operator to open the phone line for your questions. Lavanya and I are both in our London Park Royal Head Office as we take this call.

We will now take our first question from Pinar Ergun from Morgan Stanley. Please go ahead.

Hi, good morning. I have two questions, please. The first one is to what extent have supply constraints impacted volumes, especially in North America? And do you see any signs of improvement in the supply chain situation? And the second one is, do you see any possibility that consumers might spend less on premium spirits as the cost of living goes up? And I guess in that context, can Diageo continue to raise prices with a limited impact on volumes? Thank you.

Hi, Pinar. I'll take the second on premiumization trends and ask Lavanya to address your first question on supply constraints. So I would say the premiumization trends, as you know, have been very long-dated and steady in the US and in other parts of the world. People drinking better has been a trend that has really sustained through lots of cycles, economic cycles, and disruptions. The second point I'd make is, if you look at the US market, the average American household spends, that buy spirits. This is about half the household. They spend about $1 a day on spirits purchases at home. So when you're faced with an economic crunch, our product is an infrequent purchase. People typically buy spirits six or seven times a year; they buy a few bottles of a category. So if you're drinking Ketel One vodka, you're buying a few bottles a year, and it's only a few dollars more premium to low-price vodka. And so we do believe actually the sustainability is good. The other thing I would say is if you look at the demographics, young adults, America again 21 to 31, 35, over-index in buying premium spirits; the multicultural population over-indexes in buying premium spirits. And you see these demographic trends also very positive for the premiumization in spirits. So, I mean, we're not immune from overall consumer confidence and spending power, but I would say within those shifts, we still see higher price brands growing faster. And that tailwind should continue for Diageo.

I’ll take the first part of your question, Pinar. On supply constraints impacting volumes in North America. Yes, we are seeing issues that are impacting our business in North America. But having said that, our U.S. business in North America grew 3% volume in half one. If we look back at pre-COVID levels, volume growth in this business was somewhere between 1% and 2% at the top end. And so, yes, we are seeing issues there, spotty, but having said that, I think the organization is doing a fantastic job of navigating them and being able to grow volume faster than we have historically grown the business. Let me talk a little bit about where we're seeing constraints. Two areas where we're seeing issues are on certain parts of our portfolio. We’re seeing constraints in terms of aged liquid. That's true on Crown Royal and tequila liquid constraints. And then on Bulleit, we have a very specific issue around glass. And that is really impacting just the Bulleit fall through, which is the very bespoke bottles. And we're working with our strategic bottle supplier on that brand to resolve those issues.

Great, thank you.

We will now take our next question from Sanjeet Aujla from Credit Suisse. Please go ahead.

Morning, Ivan and Lavanya. Couple of questions for me, please, just following up again on the supply chain dynamics in North America. Can you give us a bit of a timeframe as to when you expect those constraints to be resolved? Or certainly moderating from what we've seen in H1? And then secondly, as you think about the pricing outlook, particularly in Europe, can you give us a sense of what sort of magnitude of pricing you feel you're in a position to take in the region? I think we've seen a lot come through in emerging markets already, but I'd be interested in how you think about Europe. And then my final question on China, if there's any color you can give us on the current sellout trends through Chinese New Year or into Chinese New Year, particularly against the heightened lockdowns that we've seen in recent weeks? Thank you.

Yes. I'll address China regarding pricing and let Lavanya discuss supply chain. In China, the market environment remains strong. Our numbers indicate that both Baidu and Scotch whiskey are maintaining good momentum. While there are effects from COVID lockdowns in some areas, overall, the situation is solid but not overly enthusiastic as we approach the Chinese New Year. Specifically, for our Baidu business, we expect fewer large-scale banqueting events and a slight decline in large-scale gifting. However, we remain optimistic about sustained growth in China for both Scotch whisky and Baidu, and we're gaining market share with promising momentum there. For the long term, we feel positive about growth prospects in China. In Europe, we've made substantial investments in our brands. We're increasing market share, having gained in five out of six markets, and our spirits business is performing strongly. As we've previously mentioned, we have various strategies to address inflationary pressures. Volume growth is aiding us, and we are seeing solid volume growth in Europe. The product mix is favorable, and we will be implementing some price increases. The combination of operational efficiency and pricing adjustments will counterbalance inflation, although we are careful in how we implement these price increases. You can expect to see more pricing adjustments in Europe due to inflationary pressures.

Yes, I will address your question about supply constraints in North America. As I mentioned earlier, we need to consider this in the context of our overall business performance, which has been outstanding in terms of volume growth in North America. Our organization has achieved strong results due to our proactive approach in this area and the strategic partnerships we maintain with key suppliers. For instance, our procurement team has successfully brought in new suppliers, allowing us to increase our glass capacity by nearly 25%. Regarding Bulleit, our teams are actively addressing the issue, and we expect it will be resolved in a matter of months, not as a long-term problem. As for the aged liquid constraints, we have several strategies to navigate this. One approach is demand shifting; we can redirect our advertising and promotional spending to parts of our portfolio that are not facing similar constraints. For example, Scotch in North America, including Johnnie Walker, has shown strong double-digit growth in that category. By combining revenue growth management and pricing strategies on the constrained areas with effective demand shaping, we are able to handle these challenges successfully.

Great, thank you.

We will now take our next question from Simon Hales from Citi. Please go ahead.

Thank you. Morning, Lavanya, morning Ivan. Three for me as well, please. Can I just follow up on those pricing comments? Are you seeing competitors really following or matching the price moves that you've been making in the U.S. and Europe? That's my first question. Secondly, and more specific to your business in the U.S., there were some mixed brand performances in the first half from the volume and sales momentum points of view. Clearly, your premium brands have done very well. Tequila, Scotch, etc., showing strong growth, but some of the more mainstream ends of the portfolio, Smirnoff and Captain Morgan, look like they're struggling a little bit, while Baileys and Bulleit admittedly, given some of the supply constraints on Bulleit, are under a bit of pressure. Can you give us a little bit more color on the drivers there, and perhaps more importantly, how we should think about how those trends will evolve in the second half? And then just finally, a quick one on CapEx. Clearly, you’re up weighting CapEx this year, I appreciate the catch-up in that sort of CapEx expectation. But how should we think about CapEx really beyond 2022?

I can start with the first two points, and Lavanya will handle CapEx. Regarding pricing, we've integrated our revenue growth management capabilities, and our analytics and data are quite strong. As I mentioned earlier, we're investing in our brand, and our brand equity is rising. We're confident in our ability to implement measured price increases while maintaining the market share momentum we desire. There are varying competitive dynamics globally, but inflationary pressures are significant for everyone at the moment. Our customers are aware of this since all products they purchase are also experiencing inflation. I believe we will maintain disciplined pricing, which will be applied selectively. We aim to sustain our growth momentum and continue attracting consumers to our brands, supported by high levels of investment in brand equity. Regarding the U.S. brands, as we recover from COVID and address supply chain challenges, we're noticing some differences in shipments versus depletions across the portfolio. Specifically, for the brands you mentioned: Captain Morgan's depletion momentum is currently positive, showing low single-digit growth. While we have previously lost market share, the trends over 12, 6, and 3 months indicate improvement. We're optimistic about Captain Morgan stabilizing, especially with our current NFL program. Smirnoff's depletions are roughly flat in the U.S., but we have strong marketing and innovation efforts planned for Smirnoff. Although these two brands may not match North American growth rates, we expect slight growth and stability. As for Baileys, it is showing positive trends due to recovery from previous shipment issues and tariff impacts. We're optimistic about Baileys in the U.S., and we've seen high single-digit depletion growth in the past six months.

Simon, I'll address the second part of your question regarding the increase in capital expenditure for fiscal '22. We expect to spend between GBP 950 million and GBP 1 billion on capital expenditures this fiscal year. This is an increase from our previous guidance and primarily reflects the resumption of projects that were delayed due to COVID. Our capital allocation strategy remains consistent, with our main focus on investing in the business, including both capital investments and expenditures. It is crucial that we have adequate capacity to support our growth ambitions and the current growth trajectory of the business. We are also committed to enhancing consumer experiences, which is vital for supporting our brands. For example, the opening of Johnnie Walker Princes Street last September has greatly enriched visitor experiences, fostering an impressive affinity for the brand. Additionally, we are focusing on enhancing our digital capabilities to drive commercial growth, improve marketing effectiveness, and develop supply chain capabilities. This will continue to be a primary area of investment for us.

Brilliant. That’s very clear. Thank you.

We will now take our next question from Mitch Collett from Deutsche Bank. Please go ahead.

Morning Ivan, morning Lavanya. I've got two questions. First, can you comment on inventory levels at the end of the half, ideally by region, particularly given the gap between depletions and shipments that you may have on brands that you've just mentioned? And then secondly, I think COGS per liter in the first half was up 1.6 year-on-year. I appreciate you say in the statement that COGS have benefited from some of your productivity efforts, but can you perhaps comment on how you've kept COGS per liter at that level given the premiumization you're seeing, and then what you would expect is a reasonable level of COGS inflation for the second half?

Sure. I can take both of the questions, Mitch. So on stock in trade inventory levels, I assume you're talking about trade stock. What we've seen across the business at a group level and within North America is that our stock in trade is relatively flat year-on-year, with shipments in line with depletion. There have been some differences across different brands within North America, and that comes from we had increased stock levels to support the opening up of the on-trade in certain brands. In other places because of just managing the timing of when product gets to the market due to various supply chain issues, we've just seen some differences between shipment and depletion at a brand level. But at the total North America level, as well as at the total group level, our shipments have been in line with depletions. On your second question on COGS and how we are able to manage cost inflation, back at the end of our year-end, last fiscal '21 year-end result, we had said we were seeing a higher level of inflation. And we're seeing that come through in terms of both commodity costs as well as synergy costs. We're also seeing the impact of higher logistics costs due to shortages of drivers and containers, that's impacting everybody, not just Diageo. Where we are seeing the leverage that we have to offset inflation is, first of all, I'll remind you that because of the nature of our business and the percentage of our business that has aged product, we have a natural buffer against inflation just because a large percentage of what we are selling today was laid down several years ago, more than a decade ago in many cases. Other than that, we're seeing the benefits of volume growth. We grew volume 9% in the half, and that contributed significantly to margin benefit. Premiumization clearly contributes to our gross margin. From a cost perspective, productivity has been a big part of what has enabled us to keep growth muted despite inflation. And that's really embedded into our everyday operations. We are seeing cost productivity come through from a procurement perspective, from a manufacturing perspective, and also from a logistics perspective. So we're seeing it really play out across the board. And then going back to looking at margin, I mean revenue growth management has enabled us to take smart pricing, manage trade spend, and manage mix in a way that allows us to grow our margins.

Thank you, Lavanya. That’s very helpful.

We will now take our next question from Celine Pannuti from JPMorgan. Please go ahead.

Good morning everyone. Thank you. My two questions, number one, I would like to understand what your best guess of what the market growth is in the U.S.? You said that 3% volume seems to be slightly ahead of the market. Could you say what the market growth rate overall is? And then my second question, I mean you have made at this point about the virtuous circle of reinvestment. And clearly, 85% of your business gaining or holding share is very impressive. That said, I was looking at the U.S. and how much your A&P has been increasing, and I look at 3% volume, which may be a bit ahead of the market, but doesn't seem to be that much ahead. So is that an observation? Or should I look at it on a total basis including the price mix benefit? And what does that mean? What do you think the support level may be that has been a bit oversized in the first half? Thank you.

I can start and let Lavanya add her insights. When considering market growth rates in light of the COVID comparisons from last year and this year, we need to be cautious. In terms of value, we estimate that the U.S. market has grown by about 9% to 10% over the past six months or the first half of this fiscal year. However, it's important to take into account what we are comparing against. Pre-COVID, the U.S. market was growing at around 4% to 5%. We believe that as we return to normalcy, growth will either match that rate or increase slightly, driven by favorable underlying demographics and consumer preferences. Our marketing investments are well-targeted, and we are confident in how we allocate these funds across brands to achieve good returns. As we have shown in recent years, investing in the U.S. is a top priority because we aim to create a sustainable growth engine in North America that will expand our market share and outperform the overall beverage alcohol market. Our profit margins remain high, and there are no structural changes affecting our U.S. business economics; the costs to compete have not increased, and our margins are not under pressure. The choices we are making are deliberate and focused on sustaining performance not just for this quarter or half-year but for the upcoming years. Many of our advertising and promotional investments will yield returns in two to four years. We are also developing smaller brands that are expected to grow significantly over the next five years. This reflects our approach to increasing marketing reinvestment in the U.S. We are confident that the capabilities Diageo has established in recent years enable us to invest wisely and achieve clear, advantageous returns over time.

Yes. I will expand on that, Ivan. Celine, we view marketing investment primarily through the lens of return on investment. It’s not just about volume growth; we focus on the overall financial return from our investments. As Ivan mentioned, we have developed various tools and capabilities in this area over time. In previous discussions, I’ve mentioned tools like catalysts that help us forecast the expected return on individual marketing expenditures and later assess whether we realized the anticipated benefits. Our North American business is a high-margin sector, and our investments in this market have enabled us to grow faster than the market and sustainably gain market share. This growth positively impacts the overall group financial performance. Therefore, as Ivan noted, it is a strategic intent to establish a sustainable growth engine for us in North America.

Thank you very much.

We will now take our next question from Olivier Nicolai from Goldman Sachs. Please go ahead.

Hi, good morning Ivan, good morning Lavanya. Just two quick questions, actually following up on the U.S. First of all, you mentioned in the press release that the price mix in the U.S. was plus 12%, and you obviously mentioned channel mix, premiumization, and pricing. Would you be able to quantify the pricing element per se? And then if we look at this year into 2022, can you give us an idea of the magnitude of the price increases you've been taking so far in your U.S. portfolio? Thank you very much.

Sure. Olivier, we don't break down the pricing that we have taken in our disclosures. But what I will say is that we look at pricing as a very surgical part of the tools within our overall revenue growth management suite of tools that we have. We've taken pricing on tequila in the first half of the year; we have taken about 4.5% pricing on tequila. And we've been able to execute it while continuing to grow the business, strong double-digit growth of 60% on that business and growing share of spirits as well as growing our share of tequilas. We've taken some pricing actions on Crown, where we have been liquid constrained. We've also taken some pricing action on Guinness. And so again, these decisions are made on an individual brand basis based on the strength of the brand, equity based on the strength of the marketing programs that we have. And as we take these pricing actions, we are doing so in a data-bound manner, balancing our top line growth with margin growth. In terms of what we should expect to see as pricing in the second half of the year, I'm not going to give you a clean answer that you would expect on this, but I will say that we will continue to evaluate pricing opportunities on a case-by-case basis, both in the U.S. as well as in other parts of the world.

Thank you very much.

We will now take our next question from Andrea Pistacchi from Bank of America. Please go ahead.

Yes, good morning Ivan and Lavanya. Three, please, if that's possible. First, I just wanted to follow-up again on pricing in the U.S. you said where you've taken pricing. And clearly, the pricing environment seems more favorable than it has been in a long time. So the question really is, is it possible to start thinking or are we far away from the point where you can really take pricing on some of the brands where there hasn't been pricing in years like the vodka portfolio or brands like Captain Morgan? Second question, please, on emerging markets where you've got very strong momentum. How do you feel about this momentum continuing as you'll be up against tougher comps and with inflationary pressures building on the consumer? And do you expect much divergence in performance among the regions in the next 6, 12 months? And then please, the last one on SG&A. It seems to me, I mean, given the organic basis points' impact on SG&A, it would suggest, I think, that our SG&A organically was up quite strongly, probably low double-digit. So I was wondering whether you could give a bit more color on that, what drove this significant increase in SG&A. Thank you.

Okay. Andrea, I take the first two and Lavanya the third. On pricing in the U.S., again, I'm not going to get into specifics of the pricing by brand. What I would say is we are and do intend to be able to take more pricing than historically. The brands have been well-invested in, and the capabilities we have on revenue growth management are really embedded and delivering. So you should see better price realization coming through on our U.S. business. And we manage the portfolio. And so as Lavanya talked about, I mean, yes, tequila and Crown and a few places, we’ve taken more significant price increases. Over time, we will look at it across the whole portfolio and ensure we can deliver the right balance of volume, price, and mix going forward. On emerging markets, I would just guide you to our medium-term guidance for Diageo that we laid out a few weeks ago. The total growth for Diageo of 5% to 7% is what we expect to see with emerging markets to grow at a bit faster rate than that. All the fundamentals actually are intact. The demographics, the penetration of spirits being low and increasing. Scotch is very vibrant. You see it in our Johnnie Walker and Scotch numbers, which came through very strongly, and I'm really pleased about that. Most of the growth in Scotch, the growth rates in the emerging markets were much faster. There is some bounce-back effect, but what happened through COVID is we did see in-home penetration increase for deluxe Scotch. And we see the recovery of the on-trade opening up strongly. So we're feeling positive about the emerging market momentum. I mean you see there is very strong momentum in Latin America. Africa has come back nicely. Guinness and beer is doing really well. Our beer business in Africa, specifically the Guinness business, is up 19%, while Johnnie Walker is up 19% as well. Smirnoff is up 15%. And then in Asia, India had a very solid performance, including Scotch, which did really well. So we do see good emerging markets always have a level of volatility, but the long-term prospects where we feel very good about this being an accretive growth business for Diageo in the years ahead.

Yes, I’ll address the question on SG&A. Our SG&A costs have risen in dollar terms, but at a significantly slower pace compared to our overall growth rate. We are witnessing notable operating leverage due to business growth. This is partly because we had previously reduced discretionary spending substantially at the onset of COVID, and that continued into the first half of fiscal '21. As things have begun to normalize and we have returned to the office, along with the Investor Relations team, we've experienced a modest recovery in travel. Essentially, we are working towards returning to a closer state of normalcy.

Okay, thanks very much.

We will now take our next question from Edward Mundy from Jefferies. Please go ahead.

Morning Ivan, morning Lavanya. Three questions from me, please. As a comment, I think, in your previous presentation around share of TBA in the on-trade, presuming this is partly a Diageo comment given that half of your brands and strong execution. But is there any early evidence that consumers are drinking more spirits and cocktails in the on-trade as the recovery comes through? The second question is really around tequila that continues to be a good part of your growth engine. We're about five years into the cycle. What gives you confidence there's still plenty of runway left for the category? And how do you think about the risk of new entrants, some of these other celebrity-endorsed brands? How do you ensure that your brands stay relevant and don't lose the momentum? And then the third question, Lavanya, on the buyback, could you just run through the reasons for the acceleration and bringing it forward by year?

I'll take the first two. We are observing stronger momentum for spirits in the on-trade, particularly in the UK. The recovery across spirits, beer, wine, and cider has been most pronounced in spirits and premium spirits. There was concern about whether consumers would downgrade when returning to the on-trade, but that hasn't occurred. Overall, we are seeing positive trends for spirits in the on-trade as it reopens. Regarding tequila, particularly in the U.S., we still believe there is significant room for growth. The category appeals to a wide range of demographics and has evolved beyond just shots and margaritas. Tequila is growing at a rate faster than the spirits industry as a whole, and while this pace won't last forever, we expect it to continue outpacing the spirits sector for the next five to ten years, capturing a larger market share. The international growth of tequila is just beginning and is currently small. However, it is gaining traction in high-end bars worldwide, with the mixology community showing a strong interest. I anticipate this will develop gradually rather than explosively. Overall, we are optimistic about the long-term growth of tequila, which is influencing our investments in Mexico for agave and distilling capacity.

I'll address your question about the acceleration of the buyback. When we announced the share buyback program in July 2019, it was for $4.5 billion to be completed over three years. We completed $1.25 billion by January 2020, but then paused the program in April due to COVID. We resumed it in May 2021 and stated our intention to complete £1 billion of buybacks by March this year. The reason for speeding up the program completion to fiscal '23 is that our leverage ratio has returned to the lower end of our target range. We aim for a net debt to EBITDA ratio of between 2.5x and 3x, and we ended the half at 2.5x. Following our capital allocation strategy, we aim to return capital to shareholders in the most effective way. Upon restarting the program in May 2021, we pushed back the completion date from the original end of '22 to the end of '24. Now that we are back within our leverage range, we have moved it forward to fiscal '23.

Okay. And Ivan, just coming back to tequila, clearly some of the other celebrity-endorsed brands are getting traction. The rock tequilas are now at 600,000 cases. I mean, how do you ensure that both Casamigos and Don Julio stay relevant and don't lose momentum?

Yes, I'm sorry, I didn't address that. I mean the key is keeping these two brands incredibly vibrant and aspirational to recruiting. I mean we've gained outsized share in tequila with Don Julio and Casamigos, right? And so that share momentum within the category, we've got to keep doing. I would say we feel good; these brands are incredibly healthy. They're on trend. We have premiumization within Don Julio happening at a terrific pace. And as we may have mentioned before, we're constrained on liquids, on 1942 and Altima, some of the higher price points. So I would say keeping these brands really healthy. It is a brand business, a premium brands business. So it's not like the wine business. You absolutely have the priority of the brand playing a very important role in this category. This is what Diageo needs to keep doing: ensuring we're at the top of our game on keeping these two brands and their market share momentum within tequila. And I feel good about the ability of the team to keep doing that, and we start from a very strong base of brand equity momentum.

We will now take our next question from Trevor Stirling from Bernstein. Please go ahead.

Good morning, Lavanya and Ivan. Three questions from my side. First one, Ivan, looking at the 8% CAGR over the last three years, which is an incredibly impressive performance, but then looking at a regional level, I’d say probably the one region that underperforms compared to potential is Asia Pacific. I wonder if you could talk a little bit about that, about the reasons behind that. But Latin America, an incredibly strong performance, and that seems to be pretty broad-based but primarily Scotch. Is that fair? So maybe a little bit of color on those two regions. And then finally, I noticed that you're investing as well behind the Diageo ONE B2B platform. Is that something that’s oriented more towards distributors or where you have direct-to-retail relationships, or a bit of both?

Sure. I will address the first two points, and Lavanya will discuss the B2B platform. The 8% growth you mentioned is over a span of three years; this business has faced disruptions due to COVID, and we are currently at that level. In Asia Pacific, several factors are at play. The growth rebound has been less pronounced, and parts of Asia continue to face challenges. In this half, Asia Pacific grew only 13%, while Latin America saw robust growth at 45% and Africa at 23%. We’re optimistic about China in Asia Pacific, and we believe it will recover. However, Australia has been a tougher market in Southeast Asia, which affects our compound annual growth rate. Despite this, I remain optimistic that India and China will be strong growth drivers for Diageo, outpacing our average growth. Southeast Asia is seeing a nice recovery in Scotch, which is a positive sign. However, we are also facing some headwinds; Australia is expected to have low growth, as will Korea and Japan, making developed Asia a lower growth region. Regarding your second question about Latin America, we are seeing strong momentum in the recovery of Scotch, with our Scotch volumes increasing by over 20% in this half, and Deluxe Scotch, particularly Johnnie Walker, experiencing over 40% growth in volumes. Interestingly, during COVID, high-priced whiskey saw faster penetration in at-home consumption. As conditions have improved and the on-trade has reopened, we are witnessing strong growth and market share gains across Latin America, except in Mexico, where we are trailing slightly. In all other markets in the region, we are gaining significant market share. I am very optimistic about our potential there, particularly with our focus on TBA share, which has provided momentum over the past couple of years. The way we are activating the occasions we are targeting has opened up more opportunities. This growth isn't limited to Scotch; Tanqueray is performing well too, and our Jim Beam business is also doing nicely. Baileys and Smirnoff are also progressing positively. Overall, I feel positive about our prospects in Latin America.

Sure. Trevor, I can take your question on Diageo ONE. It is a B2B platform; and it's basically a single point of engagement with our customers. They're able to access their account and any other Diageo content from any device anywhere at any time. It's something that we have in place now in six markets, and it enables us to provide better customer service to our customers, more digitally enabled service to our customers.

Thank you very much, Lavanya and Ivan.

We will now take our next question from Nik Oliver from UBS. Please go ahead.

Two from my side, please. First one on the emerging markets at this time and on the margins, I mean, I guess operational leverage, particularly in Africa and Latin America, has surprised to the upside in good years like now and the downside in the past. Is there anything you can share with us in terms of cost structure, fixed versus variable or anything else to maybe help us model these better going forward? And then the second one, and back to the U.S., you called out very good growth in the spirits RTDs. And where are they sourcing from, I mean, I guess some of it is cannibalizing spirits, but is a bigger part coming from outside the spirits market, beer, etc.? Thank you very much.

Yes, I can get started. On the margins in Africa and Latin America, when we went through the lockdowns, I mean, the beer business is a fixed cost business, right? So you take a big hit on the downside as volumes drop. But if they recover really fast as the volumes come back, while we were going through that correction, I wasn't particularly worried. We knew we would get the economics back on the business. You take a market like Nigeria; we've had significant margin expansion come through as that business has come back. And so what you look at going forward, to your question, is, I mean, if you've got big volatility, we want that swing of the COVID volatility; but when you have volatility in volume due to external factors, it does impact your margins. What we have stayed true to is kind of staying invested and not managing this business for short-term margins when we went through those cycles. On Latin America, similar dynamic; when we were at the height of COVID, the Scotch whiskey business, deluxe volumes dropped, that had a significant impact on margins because it’s a high-margin business. Now they’re coming back strongly. So you take a long view on both Africa and Latin America, and we do see margin expansion in both markets driven by volume growth, premiumization, pricing and productivity. We would expect steady margin expansion going forward, but as we know, it's never a straight line. What you see in Diageo's approach is we are steering the company through volatility in a way where we're really focused on getting quality sustainable growth and the economics to the right place and not having knee-jerk reactions to short-term disruptions in the external environment.

I’ll take your question, Nik, on U.S. spirits ready to drink. First of all, to say that it's a very small percentage of the business right now, and so 50% growth on a small number while really good, it's a small number. But the second thing that I'd say is one of the dynamics that we’re seeing playing out in the on-ready-to-drink category, which really caters to a convenience benefit for our consumers, it's the same thing that we're seeing in the rest of the U.S. market, where consumers are choosing to drink better. They're looking for more flavorful liquids and, frankly, more premium offerings. One of the dynamics we're seeing play out in the U.S. category is that consumers are willing to pay a significant premium to have fantastic products such as Crown Royal cocktails in a can. That is one of the drivers that we're seeing to the growth of our spirits RTD business; it is coming from people who may have been drinking other products in a can, now moving up to a much better experience with Crown Royal in a can or Tanqueray in a can or Ketel Botanical spirits in a can.

Great. Thank you very much.

We will now take our last question from Jeff Stent from BNP Paribas. Please go ahead.

Good morning. Two questions, if I may. The first one, just on India; historically, Ivan, I think you said it could be a big bonanza and needs trade discussions. And so share of…

So we're having a hard time hearing you. There's a bit of background noise.

It appears the caller may have stepped away. We will now take our last question from Chris Pitcher from Redburn. Please go ahead.

Thank you very much. I have a couple of questions. Regarding the recovery of Guinness and Travel Retail, it's impressive that Travel Retail in Latin America has returned to pre-COVID levels, despite travel restrictions. When do you anticipate other markets will return to pre-COVID levels? Do you believe reduced business travel could result in those markets being structurally lower? Additionally, could you provide information on how many of the Guinness outlets in Europe and Africa that were operational before COVID are currently open, to illustrate the reduction there? Lastly, you mentioned increasing CapEx. Considering the maturing inventories that rose in the first half, could you be on track for GBP 5 billion this year? How much are you investing to support the strong recovery in scotch, particularly in Latin America? Thank you.

Okay. I'll address Travel Retail and the recovery of Guinness. Regarding Travel Retail, we are still quite far from getting back to pre-COVID levels. However, we remain optimistic that this sector will recover. It's important to note that much of our growth is driven by personal travelers rather than business travel. While predictions from the aerospace industry and airlines are somewhat uncertain, we anticipate a significant resurgence in consumer travel. We've witnessed rapid growth as travel has started to increase, so I estimate it will take about two more years, perhaps a little longer, to reach previous levels. Our focus during this recovery will be on gaining market share, which will largely depend on the number of passengers. Concerning Guinness, was the question about how many on-trade outlets are currently closed?

In terms of the addressable market, as the market recovers in terms of the number of outlets you're trading with pre-COVID, has there been a structural reduction in the number of accounts you've got? Or...

Yes, there is a level of shakeout; unfortunately, there has been historically a good degree of churn. The weaker outlets do drop out, and then you have new entries coming in. I'd say the consumer dollars, though we feel good will come back, even though the fleet of outlet composition will change a bit, particularly for the weaker, unfortunately, for the financially weaker outlets that just haven't been able to make it through. Generally, and this is more a global number, we expect 10% to 15% of outlets to be unable to recover through the shock of what COVID has represented to them. But then you're also seeing new capital come back into the sector to expand and create new outlets or invest behind the existing fleet. Overall, I mean, Guinness recovery is happening fast as conditions improve. The brand is in healthy shape in Europe. We're seeing very good momentum actually not just in the on-trade but also in the off-trade. Some of the innovation and brand building is now kicking in, and I'm very positive on the future for Guinness in Europe, as well as in Africa, and it's strongly growing in the U.S. So the brand is in very good shape.

Yes, I'll take the second part of your question on maturing stock. I think that if you were referring to the fact that our maturing stock eventually has increased at the end of the half of fiscal '21 now close to think 4.8 billion. Look, we consider our investment in maturing stock a significant investment in the future sustainable growth of Diageo. We continuously evaluate what level of liquid to be laying down across the portfolio on Scotch, Canadian whisky, American whisky, and now on tequila as an example, on an ongoing basis. The way we look at this is critically important for us to be investing in the future growth potential for Diageo.

I can also title that quote on Guinness 0.0 in terms of the draft launch in the UK; is that pulling ahead? I know in a short bit of dry January left, but how is that all going?

We've got production constraints. The demand is way beyond what we expected on Guinness 0.0. So over the course of the next year, we hope to get back into a position of supply. That's what we're dealing with right now. The demand is far outstripping supply. Okay. Well, we'll draw to a close. Thanks, everyone, for joining the call. I appreciate your interest and support for the company and look forward to catching up with many of you. Lavanya and I will be doing the road shows virtually and look forward to catching up with many of you in the next few days.

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