Earnings Transcript for DEO - Q4 Fiscal Year 2015

Executives: Ivan Menezes - CEO Deirdre Mahlan - CFO Alasdair Musselwhite - East African Breweries Ltd at Diageo

Analysts: Olivier Nicolai - Morgan Stanley Ian Shackleton - Nomura Simon Hales - Barclays Trevor Stirling - Bernstein Andrew Stott - Bank of America Merrill Lynch Andrea Pistacchi - Citi Martin Deboo - Jefferies Andrew Holland - Societe Gen Mitch Collett - Goldman Sachs Chris Pitcher - Redburn Partners

Ivan Menezes: Good morning everyone and welcome to our results webcast. As I said in the results release our F15 performance reflects the challenges we have seen this year to top line growth. However, Diageo continues to have an enviable position. We operate in an attractive, growing, high margin industry. We are a global leader by volume, value and profitability, with an outstanding portfolio of brands across both global and local categories and price points. With these assets we can capitalize on the long term demographic, economic and consumer trends which will drive future growth in both developed and emerging markets. In the last 5 years we have transformed our geographic footprint. We now have a scale business in many of the fastest growing markets in the world, North America, Latin America, India and Africa. We are in an especially privileged position in Africa, where we are the only spirits company with an established business in all major countries. This scale enables us to build efficient disciplined operations across production, logistics, marketing and sales. We have strength in marketing and innovation and we are building world-class sales capabilities based on the sell out discipline we have now embedded. Diageo has the platform to create the best performing, most trusted and respected consumer Products Company in the world. The long term fundamental growth drivers of this industry have not changed, but the last two years have been tough and more volatile. In the US the pace of consumer recovery has been slow. In Europe, the macroeconomic environment remains fragile. In the emerging markets GDP growth has slowed. In addition, currency weakness has made imported premium spirits relatively more expensive but has opened up the opportunity for Diageo’s mainstream spirits. And the last two years have seen specific market challenges, the anti-extravagance campaign in China, which indirectly impacted our local Baijiu business, currency in Venezuela, excise duty increases on Senator Keg in Kenya, events in Ukraine which affected Russia and the challenging environment in Nigeria which we were slow to read. In managing this macro environment we have applied a long term lens. We recognized we had to change the way we operate. Our sell out discipline has changed the way we engage with customers and consumers. It is giving us greater visibility of consumer trends and reduced top line volatility. Our route to consumer focus has increased our brand visibility. They are in the right outlets, activated with flair. Ensuring we influence consumer choice at the point of purchase. We spend over £1.6 billion a year in marketing. It gives us scale and we spend it with skill and discipline. Consumers have a lot of choice. They see and hear a lot of messages. Our approach to marketing is about constant recruitment and re-recruitment. It is also about efficiency, driving marketing productivity to invest back in increased marketing activity to drive growth. We have an efficient supply chain. We have expanded capacity in Africa and Scotland. We created a center of brewing excellence in Ireland, and we rationalized our bottling and packaging facilities in both Scotland and North America. We drive sustained productivity improvements in all our activities. We now have a more proactive approach to our portfolio. Our focus is on our core assets and we have disposed of non-core assets such as Gleneagles and USL’s UB shareholding. And we have simplified and focused our business in South Africa. These changes have strengthened our business, making us more agile and better equipped to respond to a faster moving consumer environment. The single biggest change in these two years has been the focus we now bring to sell out. This shift has strengthened the business. We had about a 2 percentage point difference between shipment and depletion trends in F15 as we embedded this change. And the move to sell out and the destock in key channels has achieved 4 things. Sustainable growth with less volatility. A better relationship with customers and a closer understanding of consumer trends. Reduced working capital and higher free cash flow. And productivity in trade terms, in marketing spent, and the supply chain. In F15 we fully embedded these changes. Our move to a sellout discipline is now supported by monthly reporting which tracks shipments to depletions. Data which allows us to course correct more quickly when we see changing trends. Our route to consumer work has increased coverage by nearly 80,000 outlets. We are achieving our goal to innovate at scale. Orijin, for example, in both mainstream spirit and beer in Africa. Crown Royal Regal Apple recruited new consumers into the Crown Royal franchise, and Haig Club is bringing new consumers into whisky. We have launched powerful new campaigns. Ciroc's On Arrival campaign is a great example. We extended our leadership in luxury spirits. Our reserve brand portfolio gained 2 percentage points of share this year following share gains last year. We accelerated the delivery of the savings from our global efficiency programme and invested back in growth. The acquisition of Don Julio strengthened our portfolio, while USL has transformed our position in India. We have improved our cash conversion rates from below 90% to over 100%. 17 out of 21 markets delivered cash conversion above 100%. And we raised the bar on our 2020's sustainability and responsibility targets. And now I will hand over to Deirdre to take you through the financials.

Deirdre Mahlan: Good morning everyone. Let starting from the top, Reported net sales were up 5% despite further currency weakness as we benefitted from the addition of USL. On an organic basis net sales were flat, as destock in South East Asia and West LAC, the tough comparison in the US in H1 and the move to a replenishment system for innovation in the US in the fourth quarter offset good performance in Africa and improving trends in emerging markets generally in the second half. This year our focus on cost has delivered savings from our global efficiency programme ahead of our original expectations. These savings along with marketing efficiencies have been reinvested back into the business through our route to consumer initiatives and our marketing programmes, with the balance driving margin improvement of 24 basis points. Cash was a clear priority for improvement this year. We changed our incentive programmes and set clear targets for each market, and free cash flow improved by £700m. The sale of Bushmills and Gleneagles generated an incremental £500 million of cash. The recommended final dividend increase is 9%, in line with the increase in the interim dividend. This rate of increase recognizes that while EPS has declined, the decline was mainly driven by the impact of exchange in a year when free cash flow has improved strongly. We have continued to strengthen our portfolio. Acquisitions, primarily USL, drove reported net sales growth. With the acquisition of the remaining 50% of Don Julio, we have full participation in an exciting and fast growing segment with a fantastic brand. Furthermore, regaining control of Smirnoff distribution in Mexico will allow us to accelerate growth of the brand in that market. Exchange movements as you saw from the release, had a significant impact on net sales. The US dollar appreciated and the euro was weaker, as were most other currencies against the pound. We have been conservative in the exchange rate we used to translate the results of our Venezuelan operations, adopting the Simadi rate from April 2015. This reduced net sales by £57 million. Destock in West LAC and South East Asia and our recent changes to how we approach innovational issues in the US have impacted volume. These are the main drivers of volume being down 1%. Lower shipment volumes were however offset by positive price mix. Mix was the main driver led by the growth of reserve brands and Crown Royal. The current consumer dynamic is putting standard price points under pressure in developed markets, and in emerging markets, we are investing to give the emerging middle class consumer brands at accessible prices. Price therefore contributed only £20 million to net sales growth, mainly price increases in Venezuela and Brazil. Looking at net sales by market. US spirits net sales, which were flat in the first half were down 3% in the second half. As a result net sales were down 1.5% while depletions were up 4% for the full year. In fiscal '14, our shipments had been higher than depletions as we anticipated a recovery in the consumer environment in first half which did not materialize. In addition, at the year-end we had tried to kick start demand with significantly increasing summer programming, but the consumer response was muted. In fiscal '15, we have shipped broadly in line with depletions which has resulted in shipments being down for the year. In addition we have made changes to the way we manage shipments of new innovations. As you know, innovation is now a significant part of the US spirits sector and we expect that to continue. Innovation requires pipeline fill before we move to consumer offtake. And this increases working capital for us and our distributors. So we are making process changes to reduce this impact and we expect these changes will allow us to reduce pipeline by up to one half. Therefore, in a period when we have seen strong innovation launches for Crown Royal Regal Apple and Ciroc Pineapple, shipment growth was held back against the very strong consumer demand we have seen for these innovations. In South East Asia and West LAC we planned for reduced inventory in specific wholesale channels and have held firm on this commitment despite further softness in consumer demand. In South East Asia, we destocked around £40 million of the £70 million we want to achieve. The remainder will be completed in fiscal ’16. Events in Russia and Eastern Europe continued to disrupt demand. Net sales for Russia were down 14% reflecting destocking and down trading. And we have seen disruption in Indonesia, where recent legislation banning the sale of beer in mini marts and convenience stores led to volume decline of around 40% since the announcement of changes in January. In Africa, growth was led by the continued success of Orijin and double digit growth of spirits. In South Africa, Smirnoff 1818 grew almost 30% and broke the 2 million cases threshold and mainstream spirits drove over 20% spirits growth in East Africa. Across other emerging markets we saw growth in many countries, for example double digit growth across Mexico, Colombia and Peru which are benefitting from implementation of our route to consumer programmes, and growth in China, led by improved performance of our Baijiu business. Lower volume and positive price mix for these markets largely reflect the impact of pricing in Venezuela and Brazil. Other developed markets contributed growth, with Western Europe gaining some share in spirits and finishing the year up 1%. North Asia, Canada and Australia net sales were all ahead of last year. Looking at our net sales performance through a brand lens, blended scotch has been most impacted by market contraction and destock. For Captain Morgan, shipments were impacted by lapping the sell in of Captain Morgan White last year and by challenges to the rum category from craft beer and shot brands. Smirnoff flavors faced similar challenges in some variants, particularly in confections. In North American whiskey we have had strong growth this year with net sales up 12%. The success of Crown Royal Regal Apple and continued double digit growth of Bulleit are the key drivers. In North America, Bulleit is now an 800,000 case brand. Beer net sales grew 4% with the success of Orijin driving growth in Nigeria. Guinness performance improved this fiscal. It was flat overall and it was up 3% in developed markets following a number of successful innovations and brand communications focusing on the credentials of Guinness the brewer. Scotch malts grew double digit, led by Western Europe and The Singleton in Taiwan and China. Our innovation in single grain whisky, Haig Club, is off to a good start with sales ahead of expectations in year one. Our reserve brands in total grew 8%. While scotch and North American whiskey drove this growth, we also saw good growth in tequila from Don Julio and DeLeon, from Ciroc and from Zacapa. The improved performance of Baijiu in this fiscal added to reserve’s performance. Looking at marketing reinvestment levels over the last 3 years, we have held our marketing spend relatively stable, driving procurement savings to fund increased activity. In fiscal ’15, through actions such as renegotiation of media contracts, savings on point of sale materials and rationalization of the number of agencies that we use, we have generated procurement efficiencies of around £50 million. Most of this was reinvested, but the level of total spend was lower, generating margin improvement despite the increase in brand activities. Marketing spend was reduced in Asia Pacific, driven by a reduction in spend in China on Johnnie Walker and Shui Jing Fang, although reinvestment rates for China and for the broader region are still significantly ahead of the Diageo average. Marketing reinvestment was increased in Latin America as we continued to invest behind growth in domestic markets. From a brand perspective, we increased spend behind reserve mainly scotch malts, tequila, and the launch of Haig Club. We saw the biggest reduction in spend coming from Johnnie Walker, particularly in China and South East Asia, and also in the US following a significant increase in spend behind the brand last year. Baileys spend was down double digit driven by Western Europe as they lack activities to support innovation last year, and China, as they review their marketing strategy for the brand. The full consolidation of USL reduced margin by around 200 basis points while other acquisitions and disposals had a positive impact on margin, largely driven by the termination of the bottling contract with Cuervo. Organic operating margin was up 24 basis points as a result of significant cost savings. The global efficiency program in 2014 identified £200 million of cost savings to be delivered by fiscal 17 across three main areas organizational changes, IS and shared services and logistics savings. We delivered £127 million this year against a plan of £110 million. Savings from de-layering the organization have mostly been delivered, with some savings delivered ahead of our expected timing. Through optimizing our IS costs and leveraging regional shared service centers to provide additional support to the markets, we are driving world class levels of productivity and these savings are on track. With respect to logistics costs, we are driving savings and efficiencies in our warehousing and transport operations and around a third of the planned savings in this area have been delivered to date, slightly ahead of expectations. We have reinvested £30 million of the savings as planned, behind marketing investment, supply chain improvements and route to consumer initiatives. The procurement efficiencies I mentioned in marketing drove around half a percentage point of margin improvement. Aggregate savings from the efficiency program and other cost initiatives broadly offset cost inflation and the impact of negative market mix on operating margin of about 60 basis points. USL was fully consolidated in our results this fiscal and Ivan will talk more later about the opportunities we see with this iconic business. Before looking at the rest of the Diageo P&L, it is worth highlighting how this business has contributed to the year’s results. USL brands have added over 90 million cases to reported volume and represent almost 40% of Diageo’s volume. The inclusion of USL has increased reported net sales by £921 million, representing 9% of Diageo’s reported net sales. Once you adjust USL’s results for differences between Indian GAAP and IFRS and following the necessary fair value adjustments, operating profit before exceptional items is £53 million. With relatively high net debt in USL and an interest rate of 12%, finance charges amounted to £60 million. We are focused on reducing USL’s net debt position and the sale of non-core assets is one way in which we will do this. As part of this effort earlier this month, USL announced the sale of its shares in United Breweries Limited for around £85 million. Average net debt increased by £1.3 billion, largely driven by the acquisition of the controlling stake in USL in July 2014 and the consolidation of its debt. The increase in closing net debt is lower, at £677 million, taking into account the sale of Gleneagles and Bushmills in the second half. As a result of the increase in net debt, our closing net debt to EBITDA ratio increased from 2.5 to 2.7, still within our targeted range. Net interest charges increased by £12 million, as the increase in net debt was mostly offset by the reduction in our effective interest rate to 3.5%. Our strong balance sheet and cash delivery has continued to allow us to access commercial paper and source long term debt at very attractive rates, a combination of which was used to fund our acquisition of the 26% of USL in July. This, along with an increase in the proportion of floating rate debt through the use of fixed to floating interest rate swaps, was the main driver of the lower effective interest rate, despite the negative 40 basis points impact of consolidating USL’s debt for the first time. The increase in other finance charges is largely driven by our projections for Zacapa that resulted in an increase in the estimate of dividends payable to ILG. I expect the effective interest rate to increase to around 3.6% next year assuming an increase in LIBOR rates during the course of F16. Bringing this together, earnings per share was 88.8 pence per share, down 6.7 pence. Adverse exchange impacts and lower income from associates were the main drivers of this reduction. The tax charge for the year is lower as a result of lower profits, only partly offset by a slight increase in the effective tax rate. The external tax environment is changing, and as a result it would not be unreasonable to expect upward pressure on our tax rate over the next two to three years. We expect our effective tax rate to increase to 19% next year, reflecting the wider tax environment and higher profits from USL. In fiscal '14, non-controlling interests included a credit due to the loss made by Shuijingfang. We have recognized a profit for this business in fiscal '15, which is the main driver for the £29 million increase. EPS to dividend cover at 1.6 times is now outside our coverage ratio, and we will look to rebuild cover over time, maintaining dividend increases at a mid-single digit rate until we are back in range. The driver of the improvement in free cash flow was working capital which has been the area of focus this year. Lower debtors was driven by phasing of sales and improvement in overdues. In total, days sales outstanding reduced by 6 days. Extended creditor payment terms also improved cash. Working capital excluding maturing stock reduced by almost £360 million this year, having been up around £390 million in fiscal '14. We will look to reduce this again next year through driving efficiencies and improving processes, and expect it to come down a further £100 million year-on-year. Interest paid reduced in the year. This was driven by phasing of bond payments compared to the prior year and income generated from interest rate swaps as we rebalanced our fix to floating debt exposure. Tax payments were slightly higher than last year and I expect there will be a further slight increase next year. Net capital expenditure was £569 million, £586 million including USL. In fiscal '16, I expect CapEx to be broadly in line with this year. Contributions to pension plans were lower than the same period last year when we made a one off payment into the Irish pension scheme. This is the main driver of the improvement in other operating activities. Cash outflows in respect of exceptional items included a payment of £74 million in respect of the settlements with the Korean customs authorities and £117 million in respect of restructuring programs. Next year this will be around £65 million. Before I hand back over to Ivan, let me bring this together and touch on what we expect to see in the year ahead. In the past year the consumer goods sector has faced a volatile global economic environment which has weakened consumer demand in many markets. Despite this difficult environment, we continued the actions begun last year to strengthen this business for near and long term performance, and the results for the full year reflect the impact of these factors. Looking at the last quarter, we can see that the actions that we have taken are beginning to improve performance. In North America, US spirits depletions in recent months have improved and were up 5% in the second half. However, as I already described, we are moving to a replenishment focus and this change in how we manage innovation shipments will impact the first half next year and I expect net sales to decline around 2% for North America in first half. We may also have fewer innovation launches as we look to build successful fiscal '15 launches, such as Crown Royal Regal Apple, to scale. The second half for North America will be much stronger as we lap the impact of these changes made in the second half this year. So for the full year I expect shipment and depletion growth to be more in line. In Europe, we finished the year with a strong quarter, up 2%, largely driven by phasing of sales and innovation launches in Great Britain. We expect Western Europe to continue to improve in fiscal '16, although it is subject to Greece and the outcome there. In Turkey we expect growth to continue in line with this year, and while we remain cautious about performance in Russia, we do expect improvement against the 14% decline this year. Net sales in Asia Pacific were up 7% in the fourth quarter, although this did include a 3 percentage point benefit from the inclusion of a fifth quarter of Shuijingfang sales. While the destock in South East Asia and disruption in Indonesia will continue into fiscal '16, we expect Asia Pac to post growth in fiscal '16, especially as United Spirits will contribute towards organic growth. In Latin America, as we anticipated, the fourth quarter benefitted from phasing versus the third quarter. Growth in fiscal '16 will be led by Mexico and Colombia, although the difficult market conditions in Brazil will continue to impact performance. Africa's growth has been consistent in recent quarters and we expect this trend to continue. From a margin perspective, pricing will remain challenging but positive mix from growth of reserve will continue. We will deliver the balance of the global efficiency programme, but organic margin expansion will be muted as we offset continued negative market mix. Cash will continue to be a focus and debt will further reduce in the year, improving net debt to EBITDA. In summary, we expect significant improvement in net sales performance in fiscal '16 driven by volume growth and mix. Given the current macro environment conditions, we anticipate continued weakness in the price environment in most markets. While margin will be muted, we still expect EBIT growth ahead of top line growth. Now let me hand back over to Ivan.

Ivan Menezes: Thank you, Deirdre. Deirdre has just talked to you about F16. I am going to talk about both F16 and the longer term future. We are focused on volume growth, mix and productivity gains to drive strong, sustained performance. First volume growth. In F16, our marketing will accelerate volume growth. We are global leaders when it comes to building brands. Traditionally, our marketing was focused on strengthening loyalty amongst our existing consumer base. But consumer habits have changed and consumers have more choice. Now we use great marketing to constantly recruit and then re-recruit consumers again. We engage the consumer. We re-educate them about our brands and ensure our brand messages are seen by the widest possible group of consumers. We are more visible in all media channels, traditional and digital, all of the time, with less emphasis on a single annual big bang campaign. The content we create is relevant to people and the occasions where consumers view it. It is not about digital marketing, it is about marketing effectively in a digital world. Nowhere is this change in our marketing approach more important and impactful than with our premium core brands. Over the last twelve months, we have launched powerful new campaigns with a clear objective of driving sales to improve performance. Smirnoff's Exclusively for Everybody platform has turned around Smirnoff Red in the US and delivered depletion growth in the year. The new campaign delivers a clear, authentic message to consumers. We have built a deep association between Smirnoff and Electronic Dance Music, sponsoring a series of 26 festivals this year under the Smirnoff Sound Collective banner. Smirnoff is not just another big corporate sponsor. It is a valued and active member of the EDM community. Consumers have a strong sense of what's real and what isn't. Sometimes brands will share a light-hearted message and sometimes a more serious one. I'm very proud of our active involvement in the Rainbow Laces campaign against homophobia. Great brand awareness helped increase the profile of the cause through the strength of the Smirnoff brand. The critical point is that there has to be authenticity in all communications if the brand is going to make the kind of impression that will turn into a sale. The Tonight We Tanqueray campaign is in its third year running and focuses on encouraging consumers to make the first drink of the night a Tanqueray and Tonic. The message is very simple. In the last 12 months it again delivered great results, as we have supported the campaign with increased focus on visibility and distribution in the on-trade. As last year the brand was up 6% globally, with net sales in Western Europe again up over 20%. That is absolutely fantastic for a brand which is already so well established in the region. On Guinness, we have adapted the Made of More global platform in Africa into the award winning Made of Black campaign. At a time of economic volatility, the pricing strategy we had pursued in Africa had left Guinness at too high a premium, particularly in Nigeria. But this is a great brand, which has incredible affinity with our consumers. Changing our pricing strategy and introducing a strong campaign, delivered great results. Net sales of Guinness in Africa, excluding Nigeria, were up 13%. And we are improving performance in Nigeria. This year we did not take price and we moved our marketing focus to a younger demographic. A vibrant Guinness for a new generation, and we have stabilized the share loss we experienced earlier this year. Finally, Johnnie Walker, where volume growth of our biggest brand is so important, the current campaign is iconic. But we are going to take it to a new stage, a new take on the brand’s purpose to inspire personal progress. The global launch begins in September. It will redefine scotch marketing, ensuring Johnnie Walker is the leading brand for yet another generation of LPA consumers. Having a world class marketing approach is Part One of how to grow volume. Brilliant activation of brands in outlet is Part Two. When we set up the route to consumer project, we chose 10 key markets to focus on. In each one we mapped the outlet universe and decided which outlets we wanted to actively cover, which ones we wanted to be present in, and which ones were not a priority for us. Then we laid out the sales resource we needed to achieve our target. In the last 12 months in those wave 1 markets, we have increased the number of sales people by 10% but increased the number of outlets we actively cover by nearly 30%. It means that we now cover nearly 80,000 more outlets. This additional outlet coverage has contributed roughly £90 million of net sales this year. Let’s hear an example directly from our team in Kenya.

Alasdair Musselwhite: The East African Breweries Group stretches across five countries, Kenya, Uganda, Tanzania, Rwanda and Sudan. So we have a range of different beer markets largely on which spirits is being propelled. We have the biggest opportunity in that region across most of the markets is to extend our coverage and grow our distribution and availability of our brands. One example of us extending our coverage would be in Kenya where we have upwards of 90% distribution on some of our main brands. We delivered a project called Kaskazi which is the name of a wind. And we took that project into the urban slums and peri-urban dense populated areas of Kenya, first with a pilot with 13 motorbikes. We now have 130 of them, such was the success of it. And we identified an opportunity in a market where we had strong distribution to go into areas where our traditional beer trucks and route-to-market service couldn't access. We unlocked over 40% growth in spirits and late 20% growth in beer in a market where we have a strong market position. Where we have people who might have been delivering water or milk on a bicycle, who now are driving a motorbike with a petrol engine, making three times what they did and actually using that to help their community, or indeed educate their siblings and transform their lives. So I see our business model at the lowest granular level and our brands helping to transform people's lives and create businesses. That's wonderful to see and it's magical because it shows the scale of our business and how far it can reach.

Ivan Menezes: The work the team did in Kenya was fantastic, and highlights just how big the opportunity really is for Diageo to grow the spirits market in Africa. Even in a country where we are the clear market leader, our team was able to expand distribution coverage in a matter of months. Applying the same level of improvement to the rest of Diageo, our aim is to add a further 150,000 outlets where our brands are perfectly displayed and our campaigns are perfectly executed. And our route to consumer thinking can also be expanded to capture opportunities in new marketplaces. 18 months ago we looked at how we should tap into the e-commerce opportunity. This is a channel with high growth potential, as the spirits category is still relatively underpenetrated in online shopping, with 3% of spend versus 9% for all grocery shopping. We set up a test in Western Europe and analyzed the opportunity and recruited a sales team with e-commerce experience. Our aim is now to create a £100 million business in Western Europe in 3 years. We have always been at the leading edge of innovation in our industry, but we want to do even better. The biggest opportunity is to drive innovation at scale and with more speed. A scale launch is one that delivers over £5m in net sales in year 1. This year, scale launches represented 70% of our new launch net sales, up from just over 50% last year. But scale is not enough we also need to be quick and agile. Hence our switch to a replenishment model for new launches in the U.S. We are now putting less volume into distributors at the outset and focusing instead on those innovations which are gaining traction. Crown Royal Regal Apple is a great example of this. When the brand really started to take off our supply chain acted to replenish stocks quickly. This replenishment approach will allow us to better direct marketing and sales activities at launch and reduce the volatility inherent in launching innovations. Innovation opportunities go beyond products and we are exploring new technologies through our specialist futures team. We are looking at packaging ideas. For example, to improve visibility and availability in the trade, to drive volume, this can involve advanced labeling and closure technologies to prevent counterfeiting, or new pack formats or new pack formats to meet consumer needs. A great example is the use of Tetra-Paks in emerging markets. One of the synergies we have captured from United Spirits is that Tetra-Paks cut costs and reassure consumers that the product is safe as they are difficult to tamper with. We are exploring how we can use packaging innovations such as this more widely, to accelerate mainstream spirits growth in emerging markets. Which brings me to the mainstream opportunity. We are already accessing it in beer and ready-to-drink with our success with Orijin in Nigeria and Smirnoff Double Black and Guarana in South Africa. We are now launching both brands in other African markets. While there is more we can do in these categories, the biggest opportunity is in mainstream spirits. Mainstream spirits in emerging markets, excluding USL for now, account for about 5% of our net sales and nearly 15% of our volume, both up double digit this year. In Africa, sales are up 36%, outperforming other regions, and demonstrating how our beer assets accelerate performance in an area with strong growth potential. In emerging markets consumers are moving away from the illicit sector which can account for up to 50% of overall consumption and they are moving to safe, branded liquid at an accessible price. Local production and locally sourced product can capture this opportunity. We can get to scale quickly as we did this year with Orijin in Nigeria, with Jebel in Kenya and with Smirnoff 1818 in South Africa. These brands sell at attractive margins but it is a different business model to premium international brands, greater emphasis on volume and aggressive cost engineering. But there is a second consumer opportunity in this space at a slightly higher price point. We can access it through secondary scotch brands. We can offer an aspirational, imported product at an accessible price point when currency devaluation and inflation have made premium and standard imported brands expensive in local currency. We have a 37% of share in the scotch category, but only a 13% share of this value segment. Our scotch capacity expansion, we now have the young liquid we need to meet demand for more accessible price points. A great example of this is White Horse in Latin America, up 14% this year. As the economy has slowed down, we have activated White Horse at scale, with its own signature serve, giving consumers a high quality brand as they trade down. But it’s not only about emerging markets. In the last couple of years we defocused our value and standard brands in developed markets. Consequently in the US, the performance of brands such as Popov and other standard brands like Seagram’s 7 Crown has driven most of our share loss, both volume and value. An astonishing result if you think that they account for 10 % of our net sales in the US. These brands require the right price point and this will be an area of focus for the US business going forward. And finally nowhere is the mainstream spirits opportunity larger than in India. Our most transformational acquisition of recent years was the purchase of United Spirits in India. Although it's been mentioned many times, it's worth reiterating that the long term consumer opportunity for spirits in India is unprecedented. A huge and fast growing, LPA+ population of 800 million people, increasing by 20 million per year, and many of these people have rising incomes and a cultural inclination towards drinking spirits. The recent Q1 results of USL demonstrated this improving volume performance and I am looking forward to more good quarters to come. Now let’s look at mix, within which reserve is our most important driver. Five years ago, we shifted our approach to luxury spirits and made reserve a strategic priority. We created a dedicated unit that builds brands in a different way. Our marketing and sales focus are those of a luxury company. The results have been spectacular. It shows what brand building capability and having focus can do. We have gone from 3rd place in share of super-premium spirits in 2011 to the clear market leader today. And we have continued to strengthen our exceptional portfolio through acquisition like Don Julio and innovations such as Orphan Barrel. We create stunning marketing and events, leading the development of a fine drinking culture across the world. From David Beckham and Haig Club taking over Wellington Arch in London for a week for the most exclusive party in the world. To Johnnie Walker Blue Label and Jude Law partnering to produce ‘The Wager’, launched via the internet and viewed over 30 million times. Reserve operates a specialist sales force. Making fewer sales calls in a day, they educate customers about our brands and work with them to develop stunning new serves and recipes. For example, the Tanqueray TEN Langham Martini, at the Langham Hotel in London, or the Ketel One Copper Kettle serve. We deliver presentation in the off trade. Pop-up luxury brand embassies in high profile airports for Haig Club and Johnnie Walker to generate standout visibility. Reserve is pushing the boundaries of what great presentation looks like for a spirits brand. Reserve is now a large and highly profitable business. From 9% of net sales in fiscal '11 to 13% this year and more importantly from 9% of CAAP in fiscal '11 to 15% this year. We are also building a world class capability to incubate new brands. Not all innovations reach scale quickly and we need to nurture these brands to maturity. Haig Club was designed to bring new consumers into whisky, and giving them the space to re-evaluate the category, it takes time. So we will build the brand steadily and sustainably. With our start-up spirits incubator programme, Distill Ventures, we are investing in a group of budding spirits entrepreneurs. The programme is a brilliant way for us to invest in small scale start-up brands. We know that if we bring very small brands into our portfolio prematurely they can struggle for attention and resources. So through Distill Ventures, we can invest in the early stages of growth at arm's length and then scale them up when they are ready. Finally, productivity. Cash is one way we measure productivity and Deirdre has described our stronger free cash flow. So, I am going to move to operating productivity and how delivering on this will fund investment for growth and deliver margin improvement. F16 will continue to benefit from our global efficiency programme. It delivered material savings which were reinvested into a business which, following two years of change, is now leaner and more agile today than at any other time. Diageo is better equipped to move at pace and invest cost savings effectively. We have the disciplines in place to deliver sustained productivity gains. Every budget owner is focused on looking for ways of doing things better and more efficiently. For example, in all offices in Latin America we have hot desking. It reduces office space by 25%, reducing rent and overheads. In South Africa, we saved more than £200,000 by optimizing the way we fill pallets. Let's hear from the teams on how they are doing it. The first example is from the U.S. on marketing spend efficiencies. The second is Nigeria talking about how they have reduced the cost of a bottle of Guinness there by 10% and used that saving to support our brands in a tough market where price is difficult to achieve. [Audio/Video Presentation] The examples you have just heard demonstrate the disciplined productivity focus we now have in Diageo. We have delivered effective cost reduction programmes and implemented programmes which have removed nearly £600 million of cost in the last 5 years. F16 will see the culmination of the global efficiency programme. As that comes to an end, we have been working with external advisors to benchmark our activities, internally and externally, to identify productivity gains which will free up £500 million of cost per annum in 3 years to fiscal '19. It will drive improved top and bottom line growth. Delivering our must do - ‘Drive out cost to invest in growth. Our cost base is over £7 billion. We also have £3 billion of trade spend. I have appointed Brian Franz to become Diageo’s first Chief Productivity Officer to lead the delivery of these productivity savings across cost and trade spend. We have established the areas where Brian and the markets will focus. Marketing effectiveness will be improved by more consistent and rigorous evaluation of spend to drive better returns. And opportunities exist to optimize our ways of working with vendors and rationalize the number we work with. Trade terms will be improved, reducing unconditional trade spend by adopting globally consistent trade terms across channels and customers. External and internal benchmarking across sales, finance, HR and general management, indicate there are significant savings opportunities. And there are efficiencies across indirect procurement, such as en-tightening our T&E policy. We will improve the utilization of our manufacturing capacity through volume growth which will improve the absorption of our fixed cost base. Better definition of standards for liquid quality, bottles, caps, closures and cartons for all mainstream products will also increase productivity. Continued productivity gains in shared services and better use of property and facilities complete the list of areas where we will be driving productivity. The last two years have been a period of change for Diageo. And those changes have given us the platform to deliver stronger, sustained performance. We have great brands and the widest geographic reach. The addition of USL and Don Julio gives us more great brands and broadens our geographic reach. We have embedded a sellout discipline which will reduce the volatility of our top line performance. We have improved cash conversion and enhanced our financial strength. We have expanded our outlet reach and the effectiveness of our activations in outlet. We have increased our focus on mainstream brands to provide affordable brands for consumers in emerging markets in volatile economies. We have continued to win in reserve. Extending our leadership and driving top line mix and operating margin. We have identified £500 million of productivity gains, which will provide the fuel to invest in growth and achieve our margin objectives. Deirdre has given you the outlook for F16. Increased volume growth, continued price mix at the same level as F15 and margin improvement, albeit muted as we absorb market mix. F16 will set us on an improving trajectory. From F17 we believe our trajectory becomes mid-single digit top line growth. And with productivity gains of which we will invest two thirds in top line growth and one third in margin improvement, to support our objective of 100 basis points operating margin improvement in 3 years, strong and sustained performance. Thank you for your time.

Ivan Menezes: Good morning, good afternoon and good evening, everyone. Thank you for joining the call. I'm in London with Deirdre. Hopefully, by now you've had a chance to watch our webcast and read the press release, so I think it'll be best if we go straight to questions.

Operator: [Operator Instructions] The first question is from the line of Olivier Nicolai from Morgan Stanley. Please go ahead.

Olivier Nicolai: I just got two questions. First of all, USL is obviously fully consolidated, but it was a small drag on your cash flow in 2015. Now, could we expect a positive contribution on cash from USL in full-year 2016? And just going back to your very strong cash conversion ratio in 2015, how confident are you about this ratio, could it exceed 80% again in 2016?

Ivan Menezes: Yes, thanks, Olivier. Maybe I'll just talk a bit on the broader context on both USL and cash conversion. And then I'll ask Deirdre to comment more specifically. USL, as you know, our business is performing well. The first-quarter results that were announced by USL were good-quality results in terms of top-line growth and the prestige plus end of the portfolio growing strongly. So our strategy there is working well. We do have an intent focus on margin improvement, and on cash conversion and cash delivery. As you know, the Company is still heavily levered. And I'll ask Deirdre to comment more on that. On our overall cash conversion, I'm very pleased with what you've seen in the results in F15. That's coming through real operating discipline in how we're managing the entire working capital chain. We are embedding disciplines across the business, S&OP, management of inventory, forecasting accuracy is getting better. Our route to consumer initiatives is driving less volatility in the management of the demand signal. All of that, I think, is sustainable improvement in cash conversion. Clearly, we've had an extraordinary year this year in terms of cash conversion and I expect us to continue to have good, steady cash conversion improvement, in line with the best benchmarks in the CPG world. I'll ask Deirdre to comment more specifically on both.

Deirdre Mahlan: Hi, Olivier. On India, I would say India's no different than the rest of our businesses, in that we expect them to have improving metrics with respect to cash on an ongoing basis. India is relatively new to our processes, and so I think we'll need to continue to work with them to optimize what their underlying working capital usage is. And as you know, there are some complexities in India with respect to state movements that we're still working to optimize. The short answer is I think our intent would be to continue to improve it. I couldn't give you any specific guidance on what that might be in F16, other than to say our expectation is we will look to optimize. It's not just for the efficiency, but also to get down their debt level. As USL did at the start of this fiscal year, when they sold the UB shares that is consistent with our trying to drive cash to take down the debt. I think with respect to the overall business, Ivan has said clearly what we've stated. The only thing that I would add to that is CapEx, which we've said in the presentation that we expect to be at about the same level in absolute spend on a growing net sales number. So that would also give us greater efficiency in terms of our cash.

Olivier Nicolai: Thank you. And just a quick follow-up on the US. Do you expect to grow in line with the market in 2016? And just looking at your margin there, the margin was down 47 bps in full-year '15. If we were to assume that you were to grow in line with the market, could we assume some margin recovery in full-year '16, from the stronger top line, and potentially some positive transactional effects as well?

Ivan Menezes: On the top line, Olivier, I would say for the full year, we do expect to grow in line with the industry. As you will have seen in our presentation, the H1/H2 cycle is different. We've changed our innovation replenishment model. We've been in the process of doing that for several quarters, and that'll continue into the first half. Underlying depletions, as you know, we ended the year strong. The second half was stronger than the first half. I expect that momentum to continue into fiscal '16. So, underlying depletions will be steady and strong H1 and H2. Reported shipments in NSV, H1 will be weaker, and then it will bounce back in H2. On the margin front, we're going to manage it carefully. You know the margins are high in the U.S. and this is one of our most profitable businesses. We will be looking at -- and we alluded to this, also driving volume performance in the U.S. A lot of our share erosion historically has been at the low end of the portfolio and we intend to get more competitive there, so that we get volume momentum back in the business. But on an ongoing basis, steady state, we do see the US, even from its high base, it's got all the characteristics of -- to drive margin expansion, modest, on an ongoing basis, but I want to retain the flexibility to invest behind the U.S., to really shore up the top-line momentum in a sustainable basis.

Operator: Thank you. The next question is from the line of Ian Shackleton from Nomura. Please go ahead Ian.

Ian Shackleton: Three points of just clarification on some of the guidance you've given us for the new-year and starting first with North America. When you say shipments and depletions grew up to more in line for the full year, does that mean we should be thinking about the same sort of figure? Or is it just a comment that there'll be much smaller gap for full year than in H1? Secondly, on Latin America. You've talked about some of the markets, but not given us an overall conclusion. Should we expect LatAm to be up or flat in the year? And the third question, back on free cash flow. You still had about £200 million outflow from investment in maturing stocks in FY'15. With the slowdown in Scotch’s whisky production, should we expect that number to fall quite a bit in FY'16?

Ivan Menezes: Let me take the first two questions, then I'll ask Deirdre to address the Scotch stocks question. On North America, for the full year, we've said that we expect shipments and depletions to be in line. So that is our expectation for the full year. On Latin America, if you look at our numbers, you can see improving momentum in Latin America as we went into Q4, growing roughly -- our Q4 grew about 6%, 7%. There were some phasing issues that helped that, but I would expect Latin America to be in positive growth next year. Brazil is tough and I'm not expecting much to happen in Brazil. But we're seeing good momentum in Mexico, in Peru, in Colombia I mean these markets are all up double-digit As you know, our West LAC business, we have been through in the export channels a destocking phase, so I'm confident our business is in good shape in Latin America, we will grow share. And some of those economies, as you know, are still -- growth has been subdued and we won't be immune from that, but I fully expect us to do better and to have decent growth in LAC going into fiscal '16.

Deirdre Mahlan: Good morning, Ian. With respect to the maturing stocks, as you know, we've been on an expansion plan in our distilleries and that coincided, to a large degree, with a bit of a slowdown, largely driven by the emerging markets, so we have had more maturing stock. That is a very positive thing. As you know and you will have seen from the presentation, we have the intent to grow volumes, both in standard, secondary and premium Scotch, and this gives us a fantastic opportunity to focus on volume growth. So we do expect our Scotch business to return to volume growth in the year and therefore, on a net-net basis, there will probably -- there will likely be a reduction.

Ian Shackleton: So just to be clear, we should still expect a continuing reinvestment in maturing stocks broadly in line with FY '15?

Deirdre Mahlan: In terms of the amount of Scotch that is being put away, yes. But in terms of the net effect, I expect there to be a bigger off-take. So we're not expecting a significant move. We do, of course, as you know, adjust our maturing stock production, basically to manage to a long-term growth rate. So I'm not going to say it would be precisely the same because we'll be managing that as the year goes through, but I'm not expecting any significant shift with respect to our Scotch production.

Ian Shackleton: Very good, thank you.

Operator: And next question is from the line of Simon Hales from Barclays. Please go ahead, Simon.

Simon Hales: Thank you and good morning, everybody. Three questions, if I can. I wonder if I could just start asking a little bit about FX. Clearly, there's a lot of volatility at the moment and I'm sure you've seen the impact of that as you've been preparing your outlook statement in recent weeks in relation to FX. Is there any way you can help in trying to think about how transactional FX now may move as we think about how the dollar may move over the next six months, or the rouble? I'm just trying to get to some sort of rough working rule of thumb as to how we might think about further downside or upside in terms of your FX guidance, given the volatility there.

Deirdre Mahlan: I mean, sorry. I didn't know, you had another question. Go ahead.

Simon Hales: Sorry to interrupt. I mean briefly, secondly just going back to USL, clearly no loss making overall in the year. How should we think about the development of the business from a net profit standpoint as we go into 2016? Should we be expecting this business to move into profit? I hear what you said, Deirdre, in terms of trying to reduce the interest cost burden through non-core disposals, but any help you can give us in terms of the shape of the P&L? And when you talk about potential further non-core disposals, what are you thinking of there? What is non-core still within USL? And then I did have a final third one, sorry to hog it, but just on Crown Royal. Can you talk a little bit about where you're sourcing the consumers from with Crown Royal Regal Apple and perhaps also just comment on the underlying performance of the actual Crown Royal mother brand as well in the year?

Ivan Menezes: Sure, why don't I start with Crown Royal, and I'll turn to Deirdre on FX and the USL margin question. Crown Royal Regal Apple, as you know, well we've shipped over 1 million cases. The depletions have been nearly 900,000 cases. It's been an extraordinary year 1, way exceeding our expectations. The consumer data actually is very encouraging because the consumption is cutting across gender, age and ethnicity and geography. So it's very broad-based, and it's clearly drawing new consumers into the Crown Royal franchise. What it's done on base Crown Royal is it's stabilized it. So actually, our relative trend on base Crown Royal has improved and so we see this as being helpful to the overall trademark and clearly, it's something we're analyzing and watching and supporting very closely. Our intention very much is to see the momentum continue to build as we go into fiscal '16. The consumption occasions are also quite varied. It's consumed in shots, it's consumed in cocktails, it's consumed along with mixers and so it's fundamentally bringing new consumers into the Crown Royal and into whisky, and we have hit a sweet spot here that has really broadened the franchise for the brand.

Deirdre Mahlan: I'll address the questions on FX and the USL profitability. First, on foreign exchange, with respect to the 100 million guidance that we gave, that's about a third transaction and two-thirds translation. And it is being -- if you look at the US dollar, the US dollar is positive, but less positive than it was the last time we gave the guidance. This is based on current spot rates and the spot rates have deteriorated slightly. In terms of the euro and our other emerging market currencies, they continue to be negative and the current spot rates actually have deteriorated further, and that's what's driving it. But transaction, of course, as you know, we would have some of that hedged, and so that's a smaller piece because as that phases in, we're having a smaller effect on it. On USL, you will have seen in the presentation that USL does deliver an operating profit. And as we have said, we expect that business to continue to work to improve its profitability as it strengthens its business and invests in the business. It does have -- where the net loss comes in is largely due to the interest charge. That will come down, certainly, as a result of the assets sold at the start of this year. The remaining non-core assets are largely around properties that USL holds, that they don't require. And so agents have been engaged and that will just take its natural course. We're certainly also working with them, as best we can, to help get the best possible rates for their debt and the best programming for their debt. So we'll certainly be working to get that back to a profitable position as soon as we can.

Simon Hales: Perfect. Thank you ever so much.

Operator: We have a questions now from Trevor Stirling from Bernstein. Please go ahead.

Trevor Stirling: Three questions from my side please. Ivan, if I look at net sales in fiscal ’15, reported net sales were flat but you highlighted the difference between depletions and shipments, which probably means underlying net sales running around 2% and your targets to get to mid-single digits, what do you think are going to be big drivers to get you there? Second question, you're forecasting/expecting a £500 million of savings, which would translate into 100 basis points of margin expansion, which implies about £400 million of reinvestment. Is that mainly going to be in A&P or to offset country mix? A little bit more color on where that £400 million is going would be very helpful. And the third question probably for Deirdre. On tax, Deirdre, you've guided to a 1% increase in fiscal ’16 in tax rate, but also said that pressure's likely to be upwards on that. Should we be thinking in terms of another percentage point per annum for ’17 and ’18 or is the pressure less than that?

Ivan Menezes: Hi, Trevor, thanks. Let me take the first two questions. On the NSV guidance of mid-single digits, the way we see the world is getting the U.S. back to, let's say, mid-single digits, 4, 5, 6, and we see by F17 very much all the fundamentals that we're putting in place and the changes we're making in the U.S. with things like the Activation Army and our incubation of brands. And we'll talk more about this at the investor conference in November, so that's leg number one. Leg number two is Europe's steady. Europe has come back to growth this year, Western Europe, that's one, holding that above there. And then the third, the emerging markets, which, to an extent, are clearly influenced by the GDP development there, but you can see the consistency coming through in Africa now, we were plus 6%. Latin America, I talked about, I feel better about. USL will be a clear contributor as we look at getting to about 10% growth and perhaps stronger if the economy continues to improve. And the rest of Asia, we see more stability. China is back into growth with the Baijiu business. So that's on the geographic front. On the category front, beer is coming back, so our beer business performed and we grew 4% and I would see that continuing. Reserve, as you know, we had very good momentum. And the premium core brand, in particular I'll point to Smirnoff, Guinness, Johnnie Walker and Captain Morgan, I would say our marketing has shifted quite significantly this year, and as we go into next year, which gives me more confidence on these brands. On your second question of the £500 million productivity savings, two things I would point to. One is you will -- and the 100 basis points, the margin improvement. Our intention is to invest two-thirds of the productivity savings back into the business. You will notice this time we're not announcing a new restructuring program with the one-time charge. We are going to fund the changes ourselves and we will be really looking at investing behind marketing innovation and capacity to ensure we secure the mid-single digit top-line growth. So the two really go hand in hand and we said that two-thirds of it will be invested back in the business.

Deirdre Mahlan: You don't want to answer the tax question?

Ivan Menezes: I'm looking at Deirdre here.

Trevor Stirling: Deirdre, you get the boring one.

Deirdre Mahlan: With respect to the tax rate, as you know, because this is quite topical at the moment, globally, the tax -- there has been upward pressure on the tax rate for us that had two legs. One is the mix of the markets where our growth is coming from, that had some effect; but the other thing is some of the changes that are happening, even in the developed markets and particularly around the OECD and the base erosion profit-shifting changes. So, this year, we can see, based upon what we know on legislative changes and what's happening in terms of our own mix of profits, that we expect our tax rate to be 19. I hesitate to predict what will happen beyond that because the reason why we say there's upward pressure, if you listen to what's happening in the regulatory environment and with the treasuries around tax, it's only going in one direction. Some of the proposals that are being put forward with regard -- with respect to the deductibility of interest, for example, put forward by the OECD would have a material impact on the rate for us and a number of our other UK PLCs. So we're -- right now, I'll say there's upward pressure. As soon as there is some kind of change in legislation that would give us more clarity on that, we will absolutely let you know. But right now, I wouldn't predict more other than to say it's not a favorable tax environment with respect to corporate rates.

Operator: Next question is from the line of Andrew Stott. Please go ahead. Andrew Stott from BoA Merrill Lynch.

Andrew Stott: Two questions. I just wondered if you had any thoughts on gross margin for this year ex-FX, just any pointers or moving parts there? Second one was receivables. Receivables ratio is a big part of that cash release. I’m just wonder if you think for this year there's further scope for improvement there? Thanks.

Deirdre Mahlan: On receivables specifically, or on working capital are you talking about?

Andrew Stott: On receivables specifically.

Deirdre Mahlan: Yes, I think on receivables specifically, many of the things that we're doing and actually have been referred to in terms of the productivity plan, and as you would know, some of the longer-term effects that have to do with trade terms and how we actually manage our commercial terms, are longer term in coming to be able to drive down DSOs. What we were focused on this year, if you come back to last year, we actually had a significant use of cash on receivables, it was I think because we weren't as efficient as we could be in working with our customers on how the business is managed and also on overdues -- overdue debt. And so while I think we can get some improvements next year, I think the material improvement would likely in terms of DSO and therefore receivables would likely come over time as we move to get more effective trade terms and shorten the value chain, which -- if we can shorten the value chain then, of course, our customers are more prepared to have a shorter payment period. So I think the receivables fees, there will be some movement but not anything of the size that you've seen, but we'll be working to kind off keep that moving in a positive direction. I think going forward in F16, I'd be looking to get benefits in inventories. And the work that we've been doing on S&OP planning and again, on driving efficiencies straight through logistics and end supply chain, should continue to drive -- which should begin to drive some savings and efficiencies in the amount of inventory that we're holding. So I don't think you should expect as big an impact from receivables next year.

Ivan Menezes: Your gross margin question. The gross margin excludes FX. And I think the way to think about it is, as you know, our products and country mix was a drag this year with Southeast Asia, West LAC, the scotch destocking that had taken place. And that was about 60 bps of negative drag, which we overcame by the cost savings and productivity savings to net out to the 24 bps of operating margin expansion. But there was negative impact because of the deliberate decisions we took on -- categories, Scotch in particular, and country mix this year.

Andrew Stott: Okay, so do you think that can actually level out this year, when you talk about that country mix, as you see this year?

Ivan Menezes: Yes, broadly I would say it should be -- some of the hits we took this year, we will not take the same degree of hits next year. And, I mean I expect Scotch whisky to grow in fiscal '16 and as you know, that's very accretive for us.

Deirdre Mahlan: It'd certain be less, but, of course, the overall impact on organic, because of USL, that will have a negative mix effect because of the overall margins there. But the drag that we've been getting from what's been happening in Southeast Asia and Latin America, of course, that won't repeat and that will be helpful in the overall mix.

Operator: The next question is from Andrea Pistacchi from Citi. Please go ahead Andrea.

Andrea Pistacchi: I have a couple of questions on the U.S. please. First, if you expect to sustain the 4% depletion growth that you achieved in fiscal '15, if you can sustain it in fiscal '16? And because most of the growth this year has come from Regal Apple, once you've lapped that launch, what do you think will replace Regal Apple's contribution to sustain that -- that level of depletion? And finally, if you could talk about Captain Morgan a bit. The brand was down sharply in the U.S., particularly in 2H. So what's the plan to stabilize it and where are you in the process of reducing its price premium versus competition?

Ivan Menezes: Sure. Hi, Andrea. On the depletions going forward, if you look at the U.S. portfolio in total, clearly, Regal Apple had a very strong influence on the fiscal '15 performance. But we've got more momentum in the portfolio. So if you look at brands like Bulleit, our tequila portfolio, Buchanan's, etc. they're strong but the key difference makers in terms of fiscal '16 will be to get relatively better performance from Smirnoff than we had in fiscal '15. And a big one is Captain Morgan, which is your second question, which I can talk to. On Captain Morgan, firstly outside the U.S., Captain Morgan is very strong and doing very well. In the U.S., the rum category is tough and Captain is in the most recent periods, is holding share. So we've stabilized it. But as we go into fiscal '16, we have a new campaign in place, which we're very excited about. It's called GO FULL CAPTAIN and it basically says in this age where 21 to 24 years olds have a lot of anxiety and social media and digital and staying up with everyone, we're going to put the fun back into their lives with the Captain. A lot of on-premise activation, we are scaling up our Activation Army in the United States, 250 people across 40 cities. That's going to be a big focus. So, Captain will have -- I'm confident we'll have better performance on Captain Morgan in fiscal '16 than in fiscal '15. We also have a very exciting innovation that's going to market in a few weeks. It's called CANNONBLAST and I think it's quite disruptive. But that will be incremental because we really need to get base Captain Morgan OSR into better shape. And that will be part of shoring up, to your first question. We're not relying on another Crown Royal Regal Apple-type innovation to get us there. It is getting more sustained performance across the portfolio that will get us to the depletion goals we had for North America in fiscal '16

Andrea Pistacchi: Thanks. And if I may just have a very quick follow-up. Emerging markets in fiscal '15 in aggregate, do you have a number for how much they grew in aggregate and how much growth would have been underlying ex the destocking issues?

Ivan Menezes: The total was essentially flat or was it -- I'm just looking. Minus -- just about 1% in NSV terms for total emerging markets.

Andrea Pistacchi: Minus, sorry, 1% --.

Ivan Menezes: No, no.

Andrea Pistacchi: Or plus 1%?

Ivan Menezes: Plus 0.8% in total emerging markets. And within that, you've got the destocking effects of Latin America and Southeast Asia, which are £80 million to £100 million.

Andrea Pistacchi: Thanks.

Operator: The next question is from the line of James Edwardes Jones. Please go ahead.

James Edwardes Jones: Good morning, everyone. Two questions quickly if I may. Going back to Andrew's question, I just want to understand with your guidance for margin growth and cost savings from 2017 for the next three years, have you got anything built into your assumptions in terms of country mix or category mix, either positive or negative in terms of margins there? And secondly, Ivan, in terms of the changes to marketing that you were talking about in your big brands. I'm not asking for any trade secrets, but philosophically, what are you doing? Is there some kind of overarching plan that you have to revive those big brands?

Ivan Menezes: Sure. Let me take the second one first and I'll ask Deirdre to talk about the margin mix. Fundamentally, the big shift in our marketing approach is what we call our next-generation marketing, is all about in this world when you look at consumer behavior, you look at the millennials, you look at the dynamics in our category, it's all about recruitment and re-recruitment. And so we are moving away from what I would call marketing that's been focused historically on growing loyalty with existing consumers, to marketing that's always on, marketing in a digital world, where today, we have 25% to 30% of our spend in digital. In the US it's 40%. That's going to keep going up. And the way we build our platforms and our engagement has evolved quite substantially, but at its core, the key to it is this continuous focus on recruitment and re-recruitment. And we're putting a lot more into the experiential. I talked about the US Activation Army. We've got 110 brand ambassadors around the world building up, so those are the shifts that I see. And each brand, if you look at the brand plans and we'll give you a flavor of the new campaign on Johnnie Walker in September, as to where we're taking that brand next, but it really looks quite different from the way we would do our brand marketing, say, five years ago. And this is where I think Diageo is. We are at the cutting edge in terms of thinking about how to engage and build brands in the environment in which we compete right now.

Deirdre Mahlan: With respect to the 500 million in productivity, that 500 million in productivity gave us confident that we can deliver that by looking at external benchmarks against very specific elements of our commercial practices and policies and across our supply chain and our overhead base, with respect to where we can really drive efficiencies to the program, in many ways, not different than what we have been delivering in the program over the last few years. This is a commitment really to driving future and further productivity so that we are improving our cost base and our commercial practices, up to best-in-class practices. So, in that regard, while I can look at commercial terms or I can look at specific trade terms that give me confidence and I can believe it, I have not, at this point, allocated that down to categories or brands. I think you can expect, in the coming months, as we get into the specifics by market on where the biggest opportunities are, you'll hear more about that and we'll bring you specific examples.

James Edwardes Jones: I guess, Deirdre, what I'm after is to try and get and understanding you. You've got a roughly 350 basis point difference, as Trevor was saying, between the cost savings you promised and the margin growth that you're pointing at. In a simplistic world, should we expect to see all that go into marketing or is some of it going to be absorbed by things like differential inflation, category mix, country mix and so on?

Deirdre Mahlan: Okay. Maybe I didn't understand your question first then. It is not going to be absorbed by inflation. That number is net of inflation. So we expect to deliver £5 million in productivity. That means you take your cost base, you add inflation, then after that inflation, we expect to absorb the inflation and deliver £500 million. So that's real productivity gains as opposed to an inflation element. The second piece about where it's going to be reinvested, Ivan pointed out, we're not taking a restructuring charge. Some of this will be investment in the underlying activities that are required to drive these improvements. Some of it will be brand investments. Some of it, like on our route-to-consumer program, might be around continuing to add people. So what we're going to do is invest where we see the biggest opportunities to drive growth. Our expectation going in, as Ivan said, is that we will reinvest two-thirds, and that is against our commitment to drive long-term growth in the business. And so, the exact -- again, how much that is -- like this year, where we've talked about our reinvestment of the £30 million against our savings program that's in place this year, and we talked about what we've invested that in, we will, of course, be transparent about what we reinvest it in. But today, I would expect it to be yes, against the best-returning brand activities and yes, against elements where we need to actually invest in infrastructure or people on the ground that will drive growth into the future. But our expectation is to drive growth, we'll invest and that we'll drop the remaining to the P&L. Of course, as you would also expect, if we think that we don't need all of that in order to drive the growth we need, then there could potentially be more. But right now, we see it as driving 100 basis points over three years out of that one-third that's remaining.

James Edwardes Jones: Brilliant, thank you.

Deirdre Mahlan: So, I guess, again, one other clarification if it excludes mix, etc. Well, I'm talking -- the best way -- we can't predict that mix going forward, but what we can do is know we can save gross. How much money we're going to save, real cash, and then how much we'll reinvest. And of course, we'll look to optimize the mix going forward, but that would be overlaid on top of the £500 million. So if it's a negative mix, the net margin effect would be slightly less.

James Edwardes Jones: Understood, that's very clear. Thanks, Deirdre.

Operator: The next question is from the line of Javier Gonzalez. Please go ahead.

Javier Gonzalez: A quick question on cash flow, you've mentioned that CapEx will remain flat year on year in fiscal 16, and as a consequence, with net sales growing, the percentage of sales will be coming down. I just wonder whether you could, first of all, give us a little bit of flavor/color in terms of what are the investments you're looking to make in fiscal 16. More specifically I wanted to ask what is the normalized level of CapEx for Diageo when measured in percentage terms to sales? Also, just going back to receivables and things that you can do to reduce those receivable days further, can I ask also directly is there a target level of receivable days that you think Diageo should be on?

Deirdre Mahlan: Okay, let me start with CapEx. Yes, you're right that we would expect it to come down. We used to operate, before we were entering into emerging markets, at a CapEx rate around that 4.5%-ish. I now expect it to normalize at around 5%. Part of that is to do with some policy changes where crates and bottles in emerging markets are now as CapEx. They used to be in inventory, now they are part of the underlying CapEx. So as our beer business in Africa grows, it does require more CapEx in order to be able to maintain the bottles and crates associated with the returnables business. The other elements of CapEx that I would point to are we do have continuing completing certain investments around expansion in a few of our markets with respect to mainstream spirits, which we see as an opportunity for growth going forward. And there is then the normal maintenance in our underlying manufacturing footprint. There's a bit of, also, some CapEx in the US relating to our driving productivity through that footprint into next year. Regarding receivables, the DSO number, we have DSO targets and look at what the right efficiency is on a market-by-market basis. I think it's less useful to look at it on a Group basis, so I don't look at it that way. I understand why you might. But it depends on the length of the value chain. So in some markets where the customer, their value chain is long in order to basically make it reasonable to manage their working capital. Our DSO is to be a bit longer; in places like the US, it's shorter. So I think it depends on the maturity of the value chain in total. So I guess the short answer is I don't have a specific target on a Group basis.

Javier Gonzalez: Right. And very last quick question on the US. I just wonder whether you could share with us how big is the American whiskey category within your North American business and when you blend together Bulleit and Crown Royal now, what is the growth rate that that category overall is growing at?

Ivan Menezes: Well, our North American whiskey is growing at 12%. I'm just adding up the numbers; it will be $700 million or $800 million. Well there's more. You could have had Seagram's 7 Crown. We'll get the precise number to you because we've got more brands like VO and Seagram's 7, etc.

Operator: Your next question is from Martin Deboo from Jefferies. Please go ahead.

Martin Deboo: Just one question around the North American H1/H2 guidance. I understand the shape of the guidance, but I'm not sure, Ivan, that I've understood this issue of innovation replenishment. Can you just give me a bit more color on why we're going to have the negative H1/positive H2? I just want to make sure I've understood this.

Deirdre Mahlan: It's Deirdre, I'll answer the question. I think what we found is -- and it might be a little bit longer, but I'll give you some context just so that you can understand what's happening. What we found is over the last two or three years, as our innovation business and impact in the U.S. and actually globally has gotten bigger, which is a fantastic thing I think for the sector, is that managing the volatility of innovation can be quite challenging. And we've been working over a period of time to see how we can reduce the impact of that volatility and specifically how to reduce the working capital requirements, whether that be on input or whether it be on shipments and cases for ourselves and actually through the value chain. So, for example, a couple of years ago when we -- in Ciroc, when we launched Ciroc Orange, we had difficulty staying in stock with that product and then we basically forward-shipped -- well, produced significant amounts of product and then shipped that out and then in fact found that the demand signals started to fall off and so first you have too little stock and then you have too much stock. That has created a number of difficulties. It also happened to us in our frozen pouch business where we thought that the long-term sustainability of the business was stronger than it was and put debt on it early and in fast then had the opposite effect of having to have write-offs. So what we've been doing over time is to look to move to what we refer to as a replenishment model, which is that basically the actual launch to a precision stock to actually fill the pipeline through the value chain. But rather than anticipate a growing demand signal and continue to ship in more product, we're going to be looking to replace that on a replenishment basis. So we will only ship more based upon what the distributors deplete rather than anticipating growth. And if we see that we're ship -- running short of stock, we'd frankly rather incur some expedite costs than to tie up all that working capital. And so what's going to happen is -- in fact, there was some effect of that in the fourth quarter as we started to adjust that, and in the first half, you'll see the effect, because the last -- the first half of last year where we had significant shipments of Ciroc Pineapple and Crown Royal Regal Apple, that was again effectively on a demand forecast basis as opposed to a replenishment basis. We won't be repeating that. And you just end up with a comp effect in the first half and we expect that to normalize as we move through the year.

Martin Deboo: Deirdre, that's very clear. That implies you've got launches in H1 then, because the comp effect is on the launches not on the underlying business. Am I understanding it correctly?

Deirdre Mahlan: That is right. And Ivan referred to CANNONBLAST, for example. There would be other launches that we would have. So look, the really positive thing for us is we have an ongoing good pipeline of innovation in the U.S. and we expect it to continue to be a growth opportunity for the entire sector and we expect to participate in that. So yes, there will be other launches, but I expect the year-on-year effect both in terms of likely -- although it's hard to know on innovation, likely on the size of the launch and also the amount of pipeline that we're going to sustain will be smaller in the first half of F16.

Operator: The next question is from Andrew Holland from Societe Gen. Please go ahead. Andrew's line is now open. Thank you

Andrew Holland: Yes, just two questions. Firstly, just looking at the category trends in the US, which I think we're all familiar with; vodka perhaps losing out to North American whiskey. Do you see any reason why those trends should change over the next year? One of your competitors, one of your peers is describing this as a generational shift away from white spirits, particularly vodka, towards North American whiskey. Do you see it that way? Second question is just another sort of little elephant in the room, the SEC enquiry. It strikes me that trade loading has been a feature of the industry for a very long time and it's not just Diageo that does it. What makes the SEC interested now and why are they talking to you and not your peers, or are they in fact talking to your peers?

Ivan Menezes: Andrew, on the SEC, there's an information request in from them and we are complying and providing them information on U.S. distribution. It wouldn't be appropriate for me to comment any more. There are no allegations. What I will say is in terms of how we operate our business and our Company is that we operate to the highest standards of reporting, controls, transparency and we take those obligations very seriously. On category trends, let's not forget vodka is still growing and the vodka category is still big in the U.S. and it is still in growth. Flavors are clearly going to shake out and there's more pressure on flavors. My view on this is when you look at category trends over decades, they do shift and I think companies that are successful are going to stay -- anticipate those strengths and stay ahead of them. And one of the strengths of our portfolio in the U.S. is that we've got very good brand category and price-point representation and a very good innovation capability. And we will add what I think is a world-class incubation capability which will enable us to build smaller and new brands as well. So I don't know where you were going with that question, but I am very confident about our ability to drive a sustained performance in the U.S. and it does take more agility, it does take being ahead of understanding the consumer trends and that's really the direction in which we are shaping our U.S. business as we go forward. I'll just come back to Javier's question earlier. North American whiskey, just confirm the number; it is £800 million growing at 12%.

Operator: Ivan, the next question is Mitch Collett from Goldman Sachs. Please go ahead.

Mitch Collett: Firstly, I wanted to clarify what you mean by margin progression being muted this year. Presumably, to some extent, that's because you're having to spend to fund the cost-saving program and as you said, that doesn't go through exceptional. Should we assume muted means less than the margin progression in F15? Secondly, you say that your dividend coverage has fallen outside of your targeted range, which I think is 1.8% to 2%. Given the muted margin progression, potential for top-line growth, I guess, could be slightly better than this year; higher tax and negative FX impact. Could you maybe just give a bit of context on what it would take to stop growing your dividend? And you said that you expect it to grow mid-single digit, so restoring cover would imply that EPS would grow more than mid-single digit. And then one very small point; I think it says that Shui Jing Fang had an additional quarter within this year. Can you maybe give a bit of context around why that was? I presume there's another quarter of costs as well as another quarter of sales. Thanks.

Deirdre Mahlan: Okay, let me talk about the margin. The margin this year, if you want to call it muted, at the 24 basis points of margin is because we delivered the cost-savings program that we've been moving forward on driving inefficiencies, but we had 60 basis points of negative market mix. And that is because effectively our higher-margin markets were either growing slower and in some cases declining and so that ends up with the mix effect. So we were still driving efficiencies and, in fact, a number of our markets continued to grow margins during the period. So that's what it is. Next year, we expect, as we mentioned earlier, that’s that impact of that negative mix will be less, although with USL coming in, there will be some negative effect. And so that's what we meant to say there.

Mitch Collett: Sorry, I wasn't suggesting this year was muted, but I thought you said on Slide 18 that from a margin perspective, there's a few bits before that about pricing, margin expansion will be muted as the offset continues negative mark-to-market mix.

Deirdre Mahlan: Okay, sorry, so yes, next year we expect there to be a relatively weak pricing environment. So we had said that while we'll get some brand mix effect benefit on our growth of our reserve brands, we're not expecting a strong pricing environment. In fact, in most parts of the world right now, it is not a strong pricing environment. So you won't see a lot of price coming through and then we'll have lower savings from our efficiency programs next year because we've delivered 127 million this year. There's some next year and there's a little bit of that left 200 million in F17 and so while we’re beginning the work on driving the next level of productivity in the business, we don't think the effect of that next year will be big. That combined with USL coming in and the fact that we're not going to have a strong pricing environment, we're not expecting significant margin expansion next year.

Mitch Collett: So does that mean more muted than this year? I guess, walking through those points, I guess it does.

Deirdre Mahlan: Yes, we expect it to be positive, but a bit more muted than this year, yes.

Mitch Collett: Okay. And then on the dividend side, given --

Deirdre Mahlan: Oh, sorry, on dividends, I lost track. I got distracted by the last one. Now, the dividend, we have a strong cash flow, we have a progressive dividend policy. We've kept our dividend at 9% this year. We are now operating outside of our dividend cover policy, which is typically -- which is at 1.8x to 2.2x cover. And so we will bring our dividend growth rate to mid-single digit until that gets back in line. We've done that in the past as well in similar kinds of circumstances. And so I think you mentioned something about reducing the dividend. There certainly is no intention to reduce the dividend. We would expect to keep it at a mid-single digit growth rate until we see it come back within the cover and then we'll consider raising it again.

Mitch Collett: I guess, given that EPS and I appreciate FX has been against you, EPS hasn't grown since 2013 does that imply that you would happily see the dividend cover continue to reduce rather than stop growing it? That would be the thing you would choose to flex, if you --?

Deirdre Mahlan: I don't expect there to be a protracted period of EPS decline, as you mentioned which are really being driven by FX. And every year, as you continue to have a weak FX the next year, as we've seen already, even with a difficult FX environment again in F16, the impacts were a bit less than they were in F15. And so I'm certain -- we're certainly not anticipating that. If it got to a period where we had 10 years of negative FX, we'd have bigger issues. But I don't and certainly it would then signal a change in the dividend. We don't see that. We think this is quite manageable up in mid-single digit range and, in fact, expect over time us to get recovery to the point that we would be able to increase it as we did kind of in the early -- as we did three or four years ago when we started increasing the dividends systemically.

Mitch Collett: And then finally, Shui Jing Fang, I think there was a quarter --.

Ivan Menezes: Yes, Shui Jing Fang, we're just adding. It's a catch-up. We were reporting that there's a quarter lag. We now have the reporting systems and the alignment with Chinese security and stock exchange requirements where we can report them together. And after 7 points of Q4 Asia-Pac revenue growth, 3 points was that. But the business overall is performing well on Shui Jing Fang. And we've got good momentum there. And I am pleased with how our Baijiu business is bouncing back.

Mitch Collett: And just to be clear, so that's about 30 basis point of benefit at the Group level. Does that go into organic or is that scope?

Ivan Menezes: It is in organic.

Mitch Collett: It's in organic, okay. Thank you.

Operator: And the final question is from the line of Chris Pitcher from Redburn Partners. Please go ahead.

Chris Pitcher: A couple of questions to finish up, firstly, on remuneration from your perspective, for the exec was F15 a better year than F14? You set some pretty aggressive cash flow targets last -- some aggressive targets last year on cash flow that weren't met. Was £2 billion ahead of your own target? And then on the share awards, you've been reducing the range for the share awards. Your guidance would imply 4% to 6%. My concern is that the lower end to the F15 award gets reduced to 3%. Can you -- I know it's only 1 percentage point, but can you reassure me that 3% growth is not now perceived as good enough at Diageo? And then the final question on India. You're talking positively about the outlook for India, but your main competitor is talking more cautiously because of regulatory changes. Can you give us a feel for what your expectations on India are in that context? Thanks.

Ivan Menezes: Chris, I knew you were going to ask about the RemCo. Well, the Remuneration Committee met yesterday. And you can be rested assured that they've -- we haven't yet, obviously, published our remuneration for the year, but you've seen where our goals and targets are set. And appropriate oversight and discipline will be applied to the awards for F15. On the target and range setting, I think you've seen where we laid out our outlook for the medium term in what we express today. So RemCo is going to be very much aligned with ensuring management has appropriately stretching targets. India has -- sorry, go ahead.

Chris Pitcher: Yes, it was just the bridge of F16 to F17 because obviously, you're saying you're expecting a lower growth year in F16. Would RemCo expect you as an executive to almost suffer that and still stick with a target of 4% to 6%? Or is there a risk at the F15 level that the low end gets reduced to 3%, which is a realistic outcome for F16 growth? That's what I'm angling at.

Ivan Menezes: No, no. The RemCo's going to stick to the targets they've laid out for us.

Chris Pitcher: Okay. It was just that bridge between '16 and '17. Thank you.

Ivan Menezes: Yes. On India, it is the pricing environment and the cost and the taxation environment is challenging. So one of the things about the nature of the Indian business is we've got state controls in many states, which limit your pricing ability. That is a challenge that USL faces and it is part of what I think will put pressure on the margin front, but, clearly, we're looking at costs, productivity, supply chain effectiveness, etc. and other areas to offset it. Our outlook for USL India, if you just look at the quarter, at the amounts, they grew 12% in terms of top line and they had a bit of EBITDA expansion and we will keep that focus going. But you don't control everything in India. And a lot of it does hinge on the ability to get price increases through in many of the states. And that's an ongoing challenge that we will work through, but, in the meantime, we're looking for strong productivity in how we manage the business, the supply chain, and we're looking at every aspect of the business to help shore up margin improvement. And clearly, the other factor we have helping us is we will be driving premiumization of that portfolio. So even in the results announced, the prestige and above categories at USL grew 17% and, as you know, we have catch-up to do there because the last five, seven years, USL didn't perform very well in that space, as one of our competitors did. And so we fully -- our strategy is very much to rebuilding our position in prestige and above and I'm encouraged by the momentum there. And that's margin accretive.

Ivan Menezes: Okay. Well, thanks, everyone. I think we're done with the questions. Appreciate everyone calling in and look forward to seeing many of you over the next few days and next week. Thank you very much.