Diageo (DEO) Q2 2016 Earnings Call


Diageo (DEO) CFO Kathryn Mikels said both the North American & European geographies lead growth

“By region, North America and Europe, Russia and Turkey were the biggest contributors to growth. Getting North America back to solid growth contributed almost 1 percentage point to Diageo’s overall growth rate of 2.8%.”

Diageo (DEO) CFO Kathryn Mikels said they’ve focused a lot of resources on building out their distribution

“Our distribution changes range from increasing our salesforce by 35% in Europe, almost doubling the number of outlets we call upon, to work with our distributors in emerging markets like Colombia, where we have grown our distributor network to ensure we have thescale to deliver on our mainstream spirits agenda. In Kenya we are investing in our distributors’ sales capability, with training and support, to improve their efficiency and increase our trade coverage.”

Significant growth across their largest brands

“All six global giants, Johnnie Walker, Smirnoff, Captain Morgan, Guinness, Baileys and Tanqueray were back in growth this year.  Johnnie Walker grew 1% with reserve brands up 10%.  Smirnoff and Captain Morgan’s improvement was driven by their performance in the US with continued good growth in Europe.”

They’ve been able to identify market efficiencies to help the bottom line

“Again this year the business has delivered significant marketing efficiencies. Thesehave been achieved through optimising digital partnerships, benchmarking our contracts to renegotiate better deals, and working smarter with our creative agencies. Our North American and European businesses have so far led the way on this journey, with more to be done globally through our productivity program.”

They expect a weak British pound will be a tailwind for their business into next year 

“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.  Using the current spot rates exchange is forecast to benefit net sales by £1.1 billion and operating profit by roughly £370 million.”

Diageo (DEO) CEO Ivan Menzes said their Captain Morgan brand is playing a unique role in the election cycle

“Captain Morgan is also back in growth with a new vibrancy. It is one of the most distinctly recognised brands in spirits and “Captain & Coke” is still a top 5 branded bar call.  In this rather unusual election year in the US, The Captain is championing the cause for a Constitutional Amendment to allow under 35 year olds to run for President.”

Much like the rest of the consumer packaged goods industry, they’ve implemented a zero based budgeting program to figure out where they may be able to save on costs 

“We have deployed a Zero Based Budgeting approach for our indirect cost sand external benchmarking shows this is one of the best in class ZBB methodologies. We have a bottom up ‘by activity’ plan for all of our indirect spend, challenged by cost champions for each type of cost. And we measure performance by month against this plan. The ZBB process has identified significant cost reduction opportunities. Some reductions are straight forward for example,rescheduling events to run adjacent to each other in order to reduce travel costs and leveraging technology to reduce face to face internal meetings. Somer eductions are very creative. For example our legal team in South Africa now have a preferred supplier list of upcoming lawyers willing to take on smaller, non-critical assignments at reduced fees to enhance their CVs.”