Earnings Call Transcript - DEO Q4 2020

Operator, Operator

Good morning, and welcome to Diageo's 2020 Preliminary Results Investor Q&A Call. Your call today will be hosted by Diageo's CEO, Ivan Menezes, and CFO, Kathy Mikells. We're now ready to start the call. Mr. Menezes, please go ahead.

Ivan Menezes, CEO

Thank you. Good morning, everyone, and welcome to our preliminary results call. I hope you and your families have been staying well through this time. Fiscal '20 was a year of two distinct halves. In the first half, we delivered good, consistent performance, with broad-based organic growth across regions, categories, and we had margin expansion. Our second half performance, however, was significantly impacted by the global outbreak of COVID-19, with the peak of the impact occurring in Q4. We adapted quickly and acted decisively to protect our people and our business. We supported our customers, trade partners, and communities. We stayed connected to our consumers and rapidly responded to the changing needs. We reduced expenditure, conserved cash, and raised additional liquidity. The strong foundation we built over the last 6 years has increased our resilience and agility, and smart investment has given us the technology tools to be effective in this environment. Our insights have enabled us to stay close to consumers, and we've continuously refocused our marketing investments to capture opportunities and strengthen brand equity. The U.S., our largest and most profitable market, has been most resilient. Off-trade demand was strong during lockdown, and our tequila and Canadian whiskey brands continued to perform particularly well through the year. Depletions were ahead of shipments, which resulted in a reduction in distributor inventories. In our other regions, we had a much higher on-trade exposure, which meant the impact on our business was more severe. For example, in Europe, around 50% of our sales are normally on-trade, and Africa is a strongly on-trade-oriented region. As these two regions are our largest beer markets, the decline in our beer business looked significant during COVID-19. In aggregate, around three-fourths of Guinness sales are on-trade in the larger Guinness markets in Europe and Africa. The impact of COVID-19 was also disproportionately high for our scotch category due to its greater exposure to emerging markets and travel retail. Together, they account for over two-thirds of our scotch net sales prior to COVID-19. So across all our markets, we moved rapidly to adapt to the reduction in consumer demand caused by COVID-19 in keeping with our disciplined sell-out culture. Our decision to take back around 500,000 Guinness kegs from customers demonstrates our commitment to quality. We've also been very disciplined in our working capital management. While the on-trade is gradually reopening in many of our markets, we expect volatility to continue. Given the significant uncertainty around the pace and shape of recovery, we're not providing specific revenue and profit guidance for fiscal '21. We expect organic net revenue in the first half of fiscal '21 to be significantly impacted. However, within Q4 of fiscal '20, we saw sequential improvements. We expect that to continue into fiscal '21, with sequential improvement in the first and second quarter as the on-trade continues to reopen and consumer demand begins to recover. Today, we announced that we are recommending a final dividend in line with fiscal '19, bringing the full year dividend growth to 2%. This reflects our long-term confidence in the resilience of our business and the robust fundamentals of our industry. As we manage through this period, we are determined to emerge stronger. We are rapidly responding to changing consumer opportunities, investing with agility in marketing and innovation, partnering with our customers to win across all channels, driving efficiencies in cost and cash management, and continuing to do business in the right way from grain to glass. And with that, Kathy and I are ready to take your questions. Let's open the line for questions.

Operator, Operator

We have our first question from Sanjeet Aujla from Crédit Suisse.

Sanjeet Aujla, Analyst

A couple of questions, please. Firstly, the latest market data from the U.S. and also the new data from Europe, it seems like Diageo is underperforming the category within the off-premise channel. Can you just talk a bit about your competitiveness in the off-trade, in particular, post-COVID? And then in emerging markets, are you seeing any signs of consumers down-trading from the spirit category to lower price products or even to beer?

Ivan Menezes, CEO

Sure. Sanjeet, your question on U.S. share performance in the off-trade, if you look at our performance across the portfolio, we've got, I'd say, share-gaining brands and share-losing brands. Clearly, tequila and our North American whiskey brands are doing very well. Vodka and rum are tougher. What I would point to is, firstly, Nielsen and NABCA represent about 40 to 45% of the market. As I had indicated, our depletions ran ahead of our shipments. However, we're slightly behind the market. If you go back the past 18 months, the U.S. has been in line with the market. We were slightly behind right now when you look at our depletion growth relative to the industry growth. And we are very focused in our actions to make sure we improve that going into fiscal '21. I have to say, overall, the strength of our U.S. performance, I'm very pleased with. And you would see our price/mix is higher than the industry. And one of the actions we have taken is not to chase share, but to really keep the quality of share growth strong. So our price/mix is running well ahead of the industry price/mix if you look at the last few months. On the emerging markets, I'd say you've got a couple of impacts. One is imported products like scotch. Particularly when you have currency devaluations and economic slowdown, you do have a natural impact of some down-trading that takes place from there. And this is not new; we've faced it over cycles, over many decades. So you would see some of our primary scotch brands like Black & White and VAT 69, et cetera, picking up, and the top end of deluxe and super deluxe scotch slowing down. I would say, overall, spirit continues to be healthy. And the breadth of our portfolio gives us the ability to say our mainstream spirits play in Africa, we see as a real opportunity for actually spirits to gain share from beer through this period. So it's market-specific trends within scotch in emerging markets, particularly where currencies and economies have taken a downward trend; we will see some short-term down-trading in scotch whiskey. But overall, spirits is healthy. And I'd say the actions we've taken to broaden our portfolio position us better to maintain our positions and indeed grow share as we go through '21.

Sanjeet Aujla, Analyst

Got it. And just following up on Europe. Any comments on share trends in Europe, particularly in the post-COVID environment in the off-trade channel?

Ivan Menezes, CEO

Yes. So just the context on Europe: One is we are heavily skewed to the on-premise in Europe, right, because of our beer business. Guinness is significantly on-premise skewed. If you look at our performance in the most recent months, the at-home performances, or the off-trade performance on beer, is improving. Guinness is actually gaining share in the off-trade. And as the on-trade comes back, and I'm just using the data point of the last few weeks in the U.K., we are also seeing Guinness perform relatively better within the beer category. So I'm feeling very good about Guinness. On spirits, we are underperforming the markets slightly, but we feel confident going into the first half of fiscal '21. We've got strong programs, good innovation, and fully expect to do better in our spirits performance going into fiscal '21. We have some specific commercial issues in markets like Germany where, because of price increases, we have taken some short-term hits. I do believe the Europe team, you'll see sequential improvement in our share performance as we go into fiscal '21.

Operator, Operator

Our next question is Simon Hales from Citi.

Simon Hales, Analyst

Just 2 or 3 for me as well, please. Can I just go back to your outlook comments just so I understand the messaging into the first half of next year clearly? I appreciate you're going to see some sequential improvement in the volume picture from Q4 into Q1 and Q2. But with regards to the margin development in the first half of the year, would you also say you expect to see a sequential improvement from the H2 level? Is that improvement relative to the sequential decline you saw in H2 on organic margins, at around 600, 700 basis points? Or is it in terms of the absolute margin level in the second half to pick up from that level? And then secondly, on stock levels. I think, Kathy, in the presentation, you talked about stock days in trade being up in a number of markets due to the reduced demand. Why don't you just expand a little bit on that? And I wonder, should we expect to see some further destocking in the first half, not only in travel retail but perhaps around scotch whiskey in emerging markets? And then just a final quick one, if I can. Back at the Capital Markets Day last year, you talked about a further £100 million, £150 million of efficiency savings to come by the end of FY '22. Is there any opportunity to accelerate some of those savings a little bit more quickly into the current fiscal year, please?

Ivan Menezes, CEO

Shall I take the stock levels and maybe you can take one and three?

Kathy Mikells, CFO

Sure.

Ivan Menezes, CEO

Okay. So on the stock levels, we feel really good about where we closed the year. Clearly, the big variable on stock levels is forward demand, forward consumer demand, and we're tracking that very closely. And our sell-out culture and the data we have now has us moving very rapidly. We indicated global travel is really hard to call the recovery on global travel. And so that could be an area, we think, which is going to be much slower in coming back. So we will not sell into that channel until we start seeing end demand pick up. In the rest of the emerging markets, I feel good about where we are on our stock levels. And we will continue to monitor it real-time and adjust very quickly. So I'm not expecting destocking in other emerging markets in a big way happening. Unless, of course, end consumer demand really drops off, which we're not anticipating. So we're in good shape on the stock levels.

Kathy Mikells, CFO

And then I'll go ahead and address, first of all, your question about our outlook comments. So we've clearly said as it relates to top line, that we're expecting to see sequential improvement in the first and the second quarter in the first half relative to what we saw in the fourth quarter in fiscal '20. As it relates to overall margin improvement, I do expect that absolute margin in the first half to be better than what we saw in the second half of fiscal '20. Obviously, I also commented that we continue to expect to see some pressure on a year-over-year basis. And then you had asked about overall cost savings. What I'd say is, clearly, we've looked to continue to push hard on everyday efficiency. And during this COVID period, I'd say we especially scrubbed harder at what I would call discretionary spending. So we've tried to take the approach of, I'll call it, going to the paper on discretionary spending and do the spending that we think is critical to the business. So overall efficiencies, I would characterize as actually running on the higher side, if not ahead of what I talked about on Capital Markets Day. Now the flip side of that is we've unfortunately seen the volume decline, and that's causing negative gearing in the P&L. And I would just remind you that roughly 15% of our business is a beer business. In a place like Africa, 60% of our Africa business is a beer business. And so that business has, I'll call it, higher fixed costs within COGS. And so when volumes decline, we would see a bit more pressure in terms of negative leverage across the P&L.

Operator, Operator

Our next speaker is Olivier Nicolai from Goldman Sachs.

Olivier Nicolai, Analyst

Just a couple of questions, please, on e-commerce. You mentioned in the presentation you've seen some relaxation of regulation allowing you to do more e-commerce. In the U.S. specifically, what is the current business model that you're using? And how do you see things evolving as we come out of this crisis? And just lastly, can you remind us what's the strength you faced in e-commerce as a group, please?

Ivan Menezes, CEO

Olivier, the percentage of sales, firstly, is small. It's low single digits. But what I'd point to you is, if you look at our Q4 e-commerce sales relative to Q3, it doubled. So there's some accelerated growth, but we are far less penetrated than other consumer product categories, mostly because of the regulatory environment. Now some of those things are changing in markets. And we are seeing more access to e-commerce channels in Latin America, Africa, in addition to Europe and China. On your point on the U.S., the U.S. system is still operating within the constraints, but the business is running 4 times what they expected in the last few months. Now what this does is it takes its order from the consumer that picks up the product at a retail shop, a liquor store, and then delivers it. You also had retailers within states who are able to take e-commerce orders and deliver within the state to customers, and that business is growing rapidly, but it is from the liquor store to your home within the state. So we don't have national big players like Amazon, etc., in the alcohol category. It is very focused on liquor retailers and a few platforms like Drizly, and that business is growing. You also have a pick up at the store; it's growing, where people can place their orders electronically and drive by and have the product delivered at the store so they don't have to enter the store. And you've seen in states like New Jersey that has increased a lot. So the convenience and delivery to the home has picked up in the U.S., but still very much within the framework of the three tiers.

Kathy Mikells, CFO

One other thing to mention is the cocktail to go option that has been introduced in the U.S., allowing customers to not only pick up great food from restaurants but also to enjoy excellent cocktails.

Operator, Operator

Our next question comes from Trevor Stirling of Bernstein.

Trevor Stirling, Analyst

Just two from my side, please. The first one, Ivan, maybe could you give us a little more color in the U.S.? Shipments are running a little behind depletions. How far behind depletions were they? And that's now stabilizing. And the share trends you mentioned earlier, is that slightly where share performance coming from lower share gains from the Casamigos of this world? Or is it higher share losses from Smirnoff and Captain Morgan? And I guess, final question, can you just comment a little bit on the Indian run rate performance? Now we're through the lockdown, what's the state of demand in India at the moment?

Ivan Menezes, CEO

Sure. I'll take the U.S. questions, and Kathy can handle India. So what we're seeing in the U.S., I would say, broadly, it's an industry, Trevor, that we think is a little hard in the last couple of months, but our estimate is it's growing around 4% in value, I'm talking U.S. spirits. You saw our shipments were doing a bit, and I'd say our depletions were somewhere in between. So we are still slightly behind the market. And the main areas where we are losing spirit share is in vodka, Captain Morgan, and a bit in Johnnie Walker, and Johnnie Walker is also linked to the lapping of White Walker from the year before. So that's broadly where we are. We have very focused plans that Debra and the team have on improving this picture as we go into fiscal '21. And we still have very some good momentum on Casamigos and Don Julio and Crown Royal, the share gainers. So that's how I would characterize that.

Kathy Mikells, CFO

And then if we just talk about India. As everyone is aware, they had a six-week complete lockdown in terms of the alcohol beverage industry in its entirety, the production, as well as overall sales. And so coming out of that, we continue to see good sequential improvement there, from May to June, and then especially into July. So July, really much stronger. So I would say we feel pretty good and confident that that continued sequential improvement in India now that the whole countrywide lockdown is over.

Operator, Operator

Our next question comes from Edward Mundy of Jefferies.

Edward Mundy, Analyst

I have a few questions. The first is about capital returns for fiscal '21. Kathy, you mentioned in the pre-release that the net results for the first half of '21 may be affected based on the current numbers. As the Board considers dividends, are there specific financial metrics that could guide decisions regarding capital returns? For example, if you reach a 4x net debt-to-EBITDA ratio. The second question is about innovation, which has been a key driver of Diageo's growth in recent years. We've observed some impressive innovations. How does COVID-19 affect your ability to introduce new products? Lastly, Ivan, I'd like to discuss sustainability. You have this new water bottle, which is quite interesting. You referenced a target related to the social environment by around 2030. Could you share what the main changes will be following the targets set for 2015 to 2020?

Kathy Mikells, CFO

Well, I'll go ahead and take the first question. So you would have seen our leverage ratio increased to 3.3x. And we have said that we target to maintain that ratio between 2.5 to 3x. We made the decision, our Board made the decision, and we announced today, although this needs to get approved at our AGM, that we're maintaining our final dividend flat. And we earlier announced in April that we paused our share repurchase program as a result of that leverage increase that you've seen. And we've further said that program continues to remain paused in fiscal '21. As you think about the impacts of COVID-19, clearly, it's had a huge impact in the fourth quarter, and we said we expect to see sequential improvement in the first quarter and the second quarter. But when we get to interims and report at that period of time, we'll be reporting a leverage ratio off of our 12-month trailing EBITDA. Right? So that's going to take into consideration a 12-month period of time that will have been fully impacted by COVID. As a result, I expect our leverage ratio is going to peak at that point in time. And then we would see improvement as we go into the second half of fiscal '21 and into fiscal '22. I kind of take a step back from that, Ed. And I'd say, if you look at the total financial picture for Diageo, I mean, we do have real financial strength. We're an A- rated company. We've taken actions to further bolster what was already a strong liquidity position. We've got £5.3 billion of standby credit facilities. We ended the year with £3.3 billion in cash. So I think we're in quite a good position to continue to make balanced decisions, I would say, with regard to shareholder return, but ensuring that we really support the ongoing investments in the business for the long term.

Ivan Menezes, CEO

And Ed, regarding innovation, we quickly reassessed our pipeline and approach. We are focusing more on significant recruitment and re-recruitment innovation for major brands. For example, in the U.K., we launched three line extensions for Gordon's Sicilian Lemon and Mediterranean Orange in the last few months, resulting in an eight-point market share gain in that time. The Captain Morgan line extension has also been introduced in the U.S. We are returning to innovation with big brands, while delaying certain brands that require on-trade support, especially since the on-trade is currently down. We are also exploring new opportunities, particularly in the ready-to-serve cocktails and premix space, where we see great potential. Diageo has a strong history of innovation, and we are not retreating from that but adapting it to current circumstances. I am confident that as we head into fiscal '21, we have exciting initiatives lined up that will enhance our performance. On sustainability, the Johnnie Walker paper bottle has generated considerable excitement, and our new Bulleit distillery is carbon-neutral, marking an important milestone. We are concluding a period in 2020 where we set goals five years ago, and the results showcased in our annual report reflect our success in carbon and water management. Looking to 2030, our goals will focus on three areas: sustainability—which includes carbon, water, recyclability, and packaging metrics; inclusion and diversity; and positive drinking. We are setting ambitious targets in all three areas, as Diageo aspires to lead in this sector. In the second half of the year, we will announce our 2030 objectives, which will be ambitious and integral to our strategy, with sufficient resources and efforts dedicated to meet these goals.

Edward Mundy, Analyst

And Kathy, just to come back to the first question. There's no sort of hard leverage target that you’re offering for dividends? I mean, you look at a number, including the run rate; your liquidity is a bit clear. There's no high leverage target that you're offering for dividends at this point?

Kathy Mikells, CFO

No. In fact, that I would have said, if you went back into Diageo's past history, at about the time that we acquired the USL business in India, we also would have exceeded our leverage targets at that time. So we will take a holistic view. And a big part of that is just getting more data and information on the pace and overall slope of the improvement and positive trajectory that we'll be seeing in the business as the on-trade starts to open up. So that's something we'll obviously be keeping in mind. And we said that the capital return decision will continue to be under review throughout fiscal '21.

Operator, Operator

Our next question comes from Pinar Ergun, Morgan Stanley.

Pinar Ergun, Analyst

I have a quick follow-up to Simon and Trevor's question on the U.S. With depletions running ahead of shipments, should we expect some catch-up in H1? And do you see wholesalers stocking up ahead of potential tariff risk? Another quick one on the U.S. Did demand for your products benefit at all from the government stimulus plans year-to-date? And do you see down-trading as a risk at all going forward? Or would you see a continuation of solid demand in the U.S.? And finally, a quick one on India. How has your long-term view on the growth potential over this market change? What was the key driver behind the impairment charge you've taken?

Ivan Menezes, CEO

I will discuss the U.S. market first and then turn it over to Kathy for India. Regarding U.S. spirits, the fact that depletions are ahead of shipments is not a major concern. The key factor we need to pay attention to is consumer spending in the second half of the year, which we are closely monitoring. We are encouraged by the positive trends in the U.S., reflected in the overall industry data from Nielsen and NABCA, which remain strong. There is certainly an influence from consumer stimulus, as we notice that people currently have the financial capacity to spend. Despite being at home, there is a noticeable willingness to spend on food, drinks, and entertainment. Historical recessions, particularly the global financial crisis, show a pattern where there was a brief period of slowdown and down-trading lasting two to three quarters. Currently, we are not observing down-trading; in fact, U.S. industry data indicates that higher price points are experiencing the fastest growth. While we may see some moderation, I do not anticipate a lasting trend, as the primary driver of growth for spirits in the U.S. continues to be spirits outpacing beer and wine. Consumption of spirits among younger Americans aged 21 and over has increased significantly, and during lockdowns, we have seen a rise in cocktail making at home. I believe the long-term outlook for premium spirits brands remains positive. There may be short-term effects if consumer spending takes a significant hit, but historically, we do not view this as a sustained or structural issue; it is likely to be temporary.

Kathy Mikells, CFO

And then I'd say specifically with regard to India, we continue to have a lot of confidence in the long-term opportunity that we have in India. More recently, we would have seen in the first half, GDP is starting to flow in India. So even ahead of the pandemic impact, we were starting to see the economy slow a bit. So that softened our results in the first half. India was up about 2% in the first half. That is later than what we think the potential of the market and our business is in India. And then as we've already mentioned in the second half, literally, the entire outside industry was closed down for six weeks. So their impact from COVID in the second half was very significant and much more material than you would have seen at the total Diageo level. We obviously had to take that into consideration, and you've seen the impairment that we've taken. But it doesn't change our view on India at all for the long term. The long-term trends there in terms of population growth over time, per capita income growth, enabling more people to afford our brands, both our international spirits and our Prestige and Above brand. And really importantly, the people in India just love whiskey. And that really goes positively for the long term for our business. So I would say, over the long term, we continue to be very bullish that that's a business that's going to be good for Diageo, and good for its shareholders.

Operator, Operator

Our next question comes from Chris Pitcher, Redburn.

Chris Pitcher, Analyst

I have a couple of questions and a clarification, please. Firstly, on China, it looks like you had a very dramatic stock reduction in the final quarter there. Could you give us confidence that you've now cleared out the excess Chinese New Year stock and that you should start to see the recovery early in the new half? And could you give us a feel for a sense of your Baiju market share is doing? Then secondly, on the U.S., you mentioned your price/mix is running ahead of the industry. It does look like it faded a bit in the second half despite what I would expect would be the period with reduced promotion. And we've been here in the past before where you've priced mix ahead of the industry and driven good margin expansion, but market share has suffered. How should we think about your relative price position? You're comfortable with the price gaps on some brands as we go into the softer economic backdrop. Should we expect increased promotion in the new financial year? And then just finally, a clarification. I think you said you wouldn't ship to global travel retail until you saw a recovery. I assume you must be selling something into global travel retail. Or are you literally not shipping anything at the moment?

Ivan Menezes, CEO

I'll take the questions about global travel and the U.S. market. Yes, global travel is seeing very little activity due to a significant drop in passenger numbers, resulting in virtually no business for us. In the U.S., I'm pleased with the NRM capabilities we've developed over the past 18 months. Additionally, we're focused on a hyper-local approach, with data available at the zip code and store level. We're leveraging analytics and data to enhance execution and pricing strategies, and we're actively managing our product mix. There has been a notable shift in how we've approached these areas in recent years. We're working to balance share, price, mix, and margins effectively, and I am confident in our team's abilities and their collaboration with distributors. We've scaled back on some lower ROI programs from the past and are concentrating on improving execution at the point of sale, including visibility, display, and innovation launches, as we enhance our measurement capabilities with our EDGE 365 tools. Overall, our aim is to achieve the right balance of price, mix, and share, and we're managing these aspects at a very detailed level. I'm optimistic about our share performance as we move into 2021.

Kathy Mikells, CFO

Regarding China and the overall reduction in stock, our Shui Jing Fang business has made public announcements. In the third and fourth quarters, we saw a decline in their first and second quarter top line as we aimed to reduce stock and trade. Specifically, in our third quarter, the top line dropped by 22%, and in the second quarter, the decrease was about 90%. This stock reduction was essential to ensure a better outcome for the second half of the year in terms of the remaining stock levels. They mentioned their goal of concluding the half with stock levels similar to those of 2018 and 2019, and they are optimistic about how they ended stock and trade. The same applies to our scotch business, where we are starting to observe an uptick, particularly in the deluxe segment, in China. Furthermore, our scotch business in Taiwan, part of our Greater China market, has shown resilience during this period. Regarding market share, it's notable that the price segment under RMB 600 hasn't performed as strongly as higher price points. Our business typically operates within the RMB 300 to RMB 600 range, partially due to bank risks and the slower recovery of business occasions compared to others. However, we had been gaining significant market share prior to this period, and I am confident we will return to that position quickly.

Operator, Operator

Our next question comes from Nik Oliver at UBS.

Nik Oliver, Analyst

It's Nik here. Well, two, actually. One, the first is an extension of Pinar's question on the U.S. And I guess if we look back to the financial crisis, I guess that the U.S. market held up fairly well volume-wise. I think it's like 2%, 2.5%, if we look at NABCA. Would that be kind of a sensible run rate to assume going forward?

Ivan Menezes, CEO

Based on current conditions, the U.S. spirits market is showing modest volume growth and slightly better value growth, which I believe will continue. The primary source of that volume growth is coming from beer and wine, which are outpacing spirits. We remain confident in the long-term consistent growth trend of the U.S. spirits market. While it's possible to see a slowdown or down-trading if the economy becomes challenging and spending tightens, we don't expect that to be lasting. Therefore, I think it's reasonable to assume that we will continue to experience low single-digit volume growth.

Nik Oliver, Analyst

Okay. And then one final one from me, please. It's on the scotch portfolio. And you called out obviously in the malt with the gin doing very well. And I guess, obviously, the blends, obviously, then comping with the launch of White Walker last year. And how are you thinking about malts versus blends over the next 12 months?

Ivan Menezes, CEO

We are clearly focused on our Malts business, along with Johnnie Walker, Buchanans, and the blends. Early in the COVID lockdown, American whiskey performed better than scotch, partly because scotch is more about malts, which tend to involve deferment. Many of these brands were also more geared towards the on-trade. We need to concentrate on revitalizing Johnnie Walker, and we have seen some improvement in share performance recently. We have significant plans for the brand. Single malt sales remain strong, and we anticipate that trend to continue.

Operator, Operator

Our next question comes from Alicia Forry of Investec.

Alicia Forry, Analyst

Ivan and Kathy, three questions from me, please. The first one, on the U.S. You mentioned distributor destocking in the U.S., but we've also heard from many consumer companies in alcohol and in other categories that U.S. retailers are also destocking. So I was wondering if you can give us your assessment of the U.S. landscape over the near term. And then secondly, beer trends at the end of the H2 period. Some peers have reported significant improvements around June. Have you seen a similar development? And then finally, on excise. You mentioned the excise in India. Are there any other key markets where there is a risk of excise or other unfavorable regulatory developments over the near term?

Ivan Menezes, CEO

Thank you. I'll address the U.S. and excise while Kathy will discuss the beer question. Generally, distributor and retailer stock levels in the U.S. are back to normal and stable, so I don't anticipate significant changes in stock levels in the spirits market moving forward. Regarding excise, while some states in India initially increased their excise taxes upon reopening, many have since reverted those increases, and we haven’t observed major changes elsewhere. It's important to convey to the government how crucial the hospitality industry is for economic recovery. One in ten jobs globally is linked to hospitality, mostly involving young people, and now is not the time to impose penalties on this sector. The understanding of the significance of bars, restaurants, and pubs to both the economy and society has grown since pre-COVID. We are collaborating with the industry to ensure this message reaches the government effectively.

Kathy Mikells, CFO

Okay. And then as it relates to beer, I would say you have to look at the specifics of our beer footprint because Europe and Africa are the largest, kind of overwhelming majority; about two-thirds of the overall beer business are in those two large regions. And so what we see is the improvement in our beer business as the on-trade opens up because both of those regions are also heavily weighted to the on-trade. So we mentioned Europe; we're about 50% weighted to the on-trade, but our beer business would be even more heavily weighted than that given how popular Guinness is in Europe specifically. And then similarly, in our Africa business, you've got countries like Kenya where some of their keg is a very strong part of that business, and it would be over 90% kind of weighted into the on-trade. And so very much tied to the on-trade of malt. I'd say when you dissect this on a market-by-market basis, the impacts of COVID and the closing of the on-trade was very different market by market. And it kind of came to Africa and Latin America later than it landed in Europe. And so as we've seen on-trade starts to open, we see that improvement coming through our beer business. But it's very market-specific. And we would certainly expect now that the on-trade is opening up more broadly across markets, that we would see that sequential improvement in beer as we talked about for the overall company.

Operator, Operator

Our next question comes from Nico Von Stackelberg from Liberum.

Nico Von Stackelberg, Analyst

Can I just summarize here? It sounds like you're saying that you do expect modest recessionary environment and maybe some down-trading for a bit of time, but the recovery of the on-trade should certainly overwhelm any temporary impacts from recession and down-trading? My second question is on just the growth rates. Could you provide me with your growth rates for Q4, how you finished Q4 and the start of Q1? Anything for short term, but it would be interesting to hear. And then finally, I'm not sure if you'll give me the answer. But I'd be curious to hear if you have any comment on consensus for FY '21. So you can see what we can see. But do you think it's achievable? And yes, what's your thoughts on consensus?

Kathy Mikells, CFO

And so clearly, what we're saying is we talk about sequential improvement to our top line in the first quarter and the second quarter of this fiscal half; we are saying that while we are expecting some impacts from both recessions overall, impacting different markets differently and some level of down-trading, that we think volumes coming back are going to overcome those other impacts. Hence, the sequential improvement we expect to see coming from the fourth quarter. As it relates to kind of overall what does our fourth quarter look like, top line overall for the half was down 23%, and for the fourth quarter, it was closer to 40%. And then specifically, as it relates to the first quarter, we're not giving out monthly numbers for the quarter. I would just go back and again tell you we've clearly already seen an improvement in terms of July relative to June, and we'd expect overall the first quarter to sequentially be better than what we saw in the fourth quarter.

Nico Von Stackelberg, Analyst

Okay. And on consensus?

Kathy Mikells, CFO

We're not giving specific guidance, so I'm not going to comment on consensus.

Operator, Operator

Our next question comes from Nikhil Chandak from Landmark Family Investment Office.

Nikhil Chandak, Analyst

I have two questions. First, regarding the U.S. market, the hard seltzer segment is clearly growing and taking significant share from traditional markets. I realize we haven't prioritized this as an opportunity, but I would like to know why we haven't explored the hard seltzer market in the U.S. and considered expanding into it. My second question is a follow-up to previous inquiries. China's contribution to our total revenues is currently less than 5%. Do you foresee this increasing over time? Is there anything specific we need to address to ensure that China becomes a more significant part of our overall business?

Ivan Menezes, CEO

In the U.S., we haven't discussed it much, but the Diageo Beer Company, which sells Guinness, beers, FMB, and seltzers, is performing very well. It is currently one of the fastest-growing beer companies in the U.S. We have a small seltzer product line, but we've intentionally chosen not to heavily invest in that category because we see better investment opportunities within our overall portfolio of beer and spirits. However, we are benefitting from the current trend, as seen in our beer company's performance in the U.S. We have introduced seltzers in Europe, specifically in the U.K. and Ireland, but we are not making it a major strategic investment priority. Regarding China, I do expect it to become a larger part of Diageo. Our two primary businesses there, Baiju, have significant growth potential, and we anticipate steady growth for that segment. We are also optimistic about the early trends in scotch whiskey, particularly at the premium level, where interest has been increasing significantly. Despite the challenging market conditions, our scotch whiskey business in Mainland China has shown growth, and scotch has outperformed other types of international spirits on e-commerce platforms. Overall, I believe that China will be an attractive growth driver for the company in the long term.

Operator, Operator

Our last question comes from Richard Withagen from Kepler.

Richard Withagen, Analyst

Yes, I have two, please. First of all, in your prepared remarks, you talked about leveraging malts.com and thebar.com. Can you give some more details on what initiatives you take in this area and how that benefits your brand portfolios? And then the second question I have, as you mentioned Radar, your tool to project market demand. Can you talk about what kind of underlying data go into Radar and if the sensitivities to this underlying data in the various regions are very different?

Ivan Menezes, CEO

Sure. Firstly, on, I'd say, digital commerce more broadly, the posture the company is taking is we want to be a leader here in the shaping of digital commerce in beverage alcohol. We have a number of initiatives, including working with the big platforms, working with retailers. And as you point out, we have some direct-to-consumer platforms like malts.com and bar.com. I'd say they're still small. We're very much in experimenting mode in markets in Europe and Brazil, etc. And we're doing it for learning, and we will clearly learn and scale up from there. But if I look at what we're doing in Europe, China, and even in the U.S. through this three-tier system, we're really building our digital commerce capabilities and moving very rapidly in that area. We're investing behind it because we do believe it's going to grow faster than the overall market. One of the things I'm encouraged by is actually our market share in e-commerce channels, for the most part, tends to be higher than in physical channels. It is an environment where well-known brands that are well supported do well.

Kathy Mikells, CFO

And then the second question was about Radar. This is, I'll call it, another module that we're adding on to our Catalyst tool. Sometimes we'll talk about our EDGE tools, which is about everyday execution at the outlet level in markets and that we're able to get a lot of data and information about what's happening around a particular outlet. So what are consumers drinking in terms of bars in the neighborhood? What are the demographics of the neighborhood? And what would that tend to lead us to believe are the best types of Diageo brands to really have at that outlet? And what are programs that we can run that will be a win-win both to Diageo and the outlet owner? So it's all about trying to get, I'll call it, hyper-local information and really trying to make sure we're on the ground getting those local insights. And so with this next module within Catalyst, that is something similar, and it's looking to grab external information, not just about the macroeconomic situation in a place like the U.S., but about the specific economic situation at a zip code level or within a region, within a state, so that we understand what's happening both at a very micro and local level. Again, so we can determine what are the best programs for us to run so that we have high confidence that our marketing dollars are really going to get a high return. So it's all about having more and more local information so that we can make local decisions. We obviously have run some national advertising campaigns, but this is about really being able to, on the ground, do different things locally that's great for our brands and overall growth for the business.

Ivan Menezes, CEO

Well, why don't I go into a close here. Again, a big thank you to everyone for your interest in the company. I hope you and your families stay well and safe. Kathy and I look forward to connecting with many of you in the next few days. Thank you.

Operator, Operator

Thank you, everyone. This concludes today's conference. Thank you for your participation. You may disconnect.