Investor Conference - 17 November Global Supply. David Gosnell, President, Global Supply and Procurement

Investor Conference - 17 November 2011 Global Supply David Gosnell, President, Global Supply and Procurement Slide 1 Title slide No script. Slide 2 Good afternoon. Welcome back to the auditorium. I m David
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Investor Conference - 17 November 2011 Global Supply David Gosnell, President, Global Supply and Procurement Slide 1 Title slide No script. Slide 2 Good afternoon. Welcome back to the auditorium. I m David Gosnell, President of Global Supply and Procurement. Slide 3 You have heard a lot today about growth, and our confidence in delivering efficient growth. There are a number of ways our supply chain supports efficient growth and today I am going to focus on two of them: First, achieving competitive advantage in our cost base to deliver margin expansion. Today, I will talk about two ways in which we will do this: asset rationalisation and more efficient sourcing. And, second, improving our service both to our customers and to support our innovation function to drive net sales growth. Slide 4 First, some context on where we are now. Diageo s total cost of goods amounts to nearly 4 billion per year. This slide shows our cost base split by product and by geographic location. The split of our COGS between categories reflects their profitability. Scotch is about 25% of our sales but less than 20% of our COGS and beer is about 20% of our sales and over a third of our COGS. The split by location shows the scale and importance of Scotland and North America supply. For this reason, our asset rationalization programmes are focused here and we are achieving substantial benefits. In the coming years, we expect to see the balance between the geographies change, as we grow our business in the emerging markets. Slide 5 In F10, like for like COGS fell by nearly 1% and in F11 we held them flat. Commodity price increase were of course higher and by mitigating the impact of inflation the price/mix the business delivered led to gross margin improvement. In F12, we are again targeting flat COGS. This is against a background of significant commodity inflation with inflation for developed markets at 2 to 3% and in emerging markets, around 6%. Slide 6 So how do we think about supply strategy? Diageo has a complex set of supply chains to service it s broad range of customers, with an extensive portfolio of brands, across many different markets. As you saw from the previous slide, we have major facilities in Scotland and North America and for these facilities our focus is on efficiency by maximising our scale. The shift of our business to the emerging markets will drive increased product complexity and will add greater volatility to the supply chain. This informs our strategy. We must enhance our ability to respond quickly to changes in the demand profile. We also need to be more agile, customising our products to find particular niches in consumer demand. Our strategic challenge is to find the optimal balance across all these competing demands. Increasingly, we manage these trade-offs by segmenting our supply chains to support a primary goal, whether its agility, responsiveness or efficiency. Slide 7 Let me clarify our approach by giving you some examples. In the developed markets of Scotland, Ireland and N America our focus is on cost minimisation through asset restructuring. We re also reducing our cost base, through game changing partnerships, such as our world class Rum distillery in St Croix on the US Virgin Islands and when we add capacity to meet future demand, for example in scotch, it is improving productivity. The growth in demand in the emerging markets means we have to move capacity in both production and distribution to the emerging markets. For example, we have relocated our service teams from Amsterdam closer to our customers. We have established regional logistics hubs that respond much faster to the market changes, with shorter lead times. And thirdly, acceleration in innovation, especially in super premium, requires greater agility in our supply chain. Let me show you all three in more detail. Slide 8 Let me start with agility. Last year 20 new launches were implemented across our markets, and there is no sign of this rate of innovation slowing down. Innovation is driving growth but it has led to additional complexity. Supporting successful product launches has required Supply to master new technologies, packaging configurations and develop new suppliers. New liquid technologies were needed to master the complexities of new flavour variants. The launch of Baileys flavours, has required us to develop new liquid manufacturing capabilities to create the range of flavours, while retaining the unique Baileys characteristics. The introduction of Parrot Bay Cocktails in North America required an innovative pouch format as Guy referenced this morning. The successful launch of Smirnoff Signature in Australia, has created an entire new category of ready-to-serve flavoured spirits, which required Supply to rapidly master and invest behind bag-in-box production for flavoured spirits. We adapted existing technology from our wine business, and it allowed us to launch ahead of competitors. The ability to adapt our existing technologies, master new technologies, and collaboratively build capabilities with our partners has proved to be a competitive advantage and has been critical in supporting growth from innovation. Slide 9 Both Paul and Ivan spoke about the opportunity for growth in luxury. Let me give you an example of the agile supply chain supporting growth in Johnnie Walker Blue Label. Our Reserve Team wanted to enhance the luxury cues of Johnnie Walker Blue. The goal was a new design which would reflect luxury to drive sales primarily in Asia. The new bottle, with its thick side wall and thick base of solid glass doubled the weight of glass and was designed to frame the whisky for the consumer. We had to invest in new packaging technologies given the increased weight and the thickness which was crucial for luxury cues. It is a great example of an agile supply chain, meeting changing customer trends. Slide 10 Given the shift of the business to emerging markets we have had to shift the focus of our supply chain. To do this we are re-locating our customer service teams from Amsterdam to Asia and Latin America, to improve our collaboration with our customers. We re coupling these changes, with the creation of logistics postponement hubs. Our postponement hub in Singapore is now fully operational, and it will handle 2.5m cases this year. The creation of the hub, has also meant we can reduce the lead time for our Asian markets from 10 weeks down to 2 weeks which reduced our end to end inventory. This is part of our continued focus on reducing inventory and it has released over 200m in cash globally since Building on our Singapore success, we have a new hub scheduled to open in Panama, to service Latin America. Slide 11 Moving now to efficiency and beginning in Scotland. In 2009 we announced our footprint changes. In manufacturing, we have rationalized our grain distillation by closing Port Dundas distillery and consolidated three coopering sites into one. In packaging and logistics, we are closing Kilmarnock packaging site and consolidated volumes into Shieldhall and Leven. This new configuration has enhanced our warehousing and logistics operations making it more responsive to market changes. These programs have reduced headcount by over 500. Our cases per man hour has improved by 6% and reduced our costs per case by 16%. Performance in Packaging has also seen a double digit increase since the launch of our Perfect Plant Program in However, we are not yet best in class in packaging but, we believe, that our recent investments in Leven and Shieldhall, will enable us to achieve this. In total our program has achieved annualized savings of 24m pa and will deliver a further 17m of savings through maturing inventory. Slide 12 In Europe, the current social and economic environment has resulted in declining beer volumes. In 2008 we announced consolidation of our brewing operations, into a new Greenfield site. The economic crisis that arose at end of 2008 led us to rethink the new Greenfield brewery, and instead we embarked on a radical transformation of existing brewing operations, to drive efficiency and reduce costs. Phase one of this achieved a headcount reduction of over 230 through; Consolidation of all kegging operations into the St James s Gate site. And a radical re-structuring of the operations in Kilkenny and Dundalk. Savings of over 5 million will be realised this year from this transformation and when fully implemented in F12, we will achieve 16M of annualized savings. A final phase of consolidation will be announced in Q Slide 13 In addition to reducing cost, we have also been investing in production capacity to meet growth in Scotch. The recently opened Roseisle malt distillery is the largest in the world, and the only malt distillery of any scale to be built in Scotland for approximately 30 years. It s also the world s greenest whisky distillery. The opening of the 40m Roseisle facility has increased our malt distilling capacity. Investment of 42m has further increased our grain distilling capacity. An additional 65m, lease funded investment, for a bio-energy plant at Cameronbridge will come on stream in early This is a global first for renewable technology and the site will be fully sustainable. We have invested 80m in Scotland. Our packaging site in Leven has created the largest spirits bottling operation in Europe. The Leven site supplies over 170 countries around the world, and the investment means that this site will more than double in size when commissioning is completed in Our investment in capacity together with the improved technologies we now employ in Scotch production, has increased productivity in Scotch distillation by over 40% since F09. Slide 14 In June 2008, in partnership with the Government of the United States Virgin Islands, Diageo announced a 30-year public-private initiative to construct a rum distillery in St. Croix. A fast track build program, reduced the overall construction time to just 15 months. The distillery will play a critical role in transforming the cost base for Captain Morgan rum, with the first rum due to be shipped in January 2012. The initiative was totally funded by USVI bonds, with no upfront costs to Diageo. Over the 30 year term of the contract, the total cash benefit is c. $900m, with the annual cash benefit being c.$30 million. Slide 15 The North America supply strategy is a great example of the global strategy. Our restructuring program in North America is focused on implementing a new packaging line strategy that will enable an efficient agile and responsive approach to manufacturing. The number of production lines will be reduced by over 30%, we will install new high speed lines to drive efficiency and install a new innovation plant. The benefit of this transformation will be a reduction of 20% in our manufacturing cost per case Slide 16 Our packaging lines are segmented and our brands are matched to the right lines. A class products are large scale, stable demand products, which are, to us, relatively straight forward to manufacture. These products are then allocated to high speed, highly efficient lines for packaging. An example of a typical A class product is Smirnoff vodka. B class products, tend to have a more volatile demand profile, with lower volumes. The production of these tends to be more complex than A class products with a larger number of liquids and packaging types. A typical example of this would be Captain Morgan private stock. C class products, typically have a highly volatile demand profile, or are extremely complex to manufacture. Many of them are new launches so we work hand in hand with our innovation colleagues to drive profitability on these products. A great example of this type of product is the recently launched Qream. Slide 17 To support the shift in our business to the emerging markets we will have to increase capex. Over the next 3 years we will invest in additional capex behind our recent acquisitions for example Zacapa and Mey İçki. If we are successful in our acquisition of Meta in Ethiopia we will build additional capacity there. We will also expand our scotch capacity to meet growing emerging market demand. These investments support our growth aspirations and the returns are high so fixed assets as a percentage of net sales will continue to be around 25%, as it has been for the last 7 years. Slide 18 I hope by our approach to segmenting our supply chains and the benefits we derive from doing so, are becoming clearer. I want to finish off, by talking through one more example. The development of the supply chain for Cîroc has evolved through the brand s different growth phases. Over time, we have seen the original variant of the brand, cycle from an agile supply chain during the launch phase, through, a much more responsive model, capable of handling the volatility in demand, to one that is now highly efficient, and maximizing the cost benefit, as the brand reaches scale. Let me show you. Slide 19 Cîroc original is a premium vodka with a unique liquid, and decorative packaging design. It was launched in 2004, with initial volumes of 5000 cases. When we launched, the liquid was produced and bottled in France, in a small, dedicated 3 rd party facility suited to producing the unique characteristics of the sugar frosted grape liquid. In addition, it was close to the source of the unique glass design which was developed for the brand. Slide 20 The brand really took off in The rate of increase in demand meant we had to react quickly to ensure we could fulfill orders. By 2010 volume had increased to 360,000 cases and we significantly increase liquid capacity. Alongside the development of a more responsive supply chain, we introduced a further requirement for agility with the launch of flavours. The volume growth of these flavours, quickly outgrew the scale of the supply chain we had in place, and we had to respond by adapting bottling lines to deal with a new mix. Slide 21 The volume of the brand has continued to grow and we have enhanced the efficiency of the supply chain. We utilized our high speed bottling lines in Scotland. The high speed line has reduced crew size by 50% and increased line speed by 23%. The brand growth has been supported by our glass supplier, who doubled their throughput. In summary, this example demonstrates our differentiated supply chain approach, designed to meet the needs of the business efficiently. Slide 22 I hope that I have shown you how we are building a competitive advantage in supply to support Diageo s growth ambitions. Our focus is on reducing cost and enhancing our service levels. We have made good progress already with our asset rationalisation programme. However, I am confident that Diageo s supply strategy will provide an even greater competitive advantage to enhance margin and enable growth. Thank you for your time. And now I will hand over to Nick to talk about Africa. Nick.
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