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"We can handle Brexit in our stride" - just-drinks talks to Diageo CEO Ivan Menezes

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On the day that Diageo released results for the first half of its fiscal-2018, just-drinks spoke to group CEO Ivan Menezes about the geopolitical issues on the horizon, Bacardi's takeover of Patron Tequila and what on earth Jane Walker will be.

Ivan Menezes spoke to just-drinks today, after the group released its latest half-year results

Ivan Menezes spoke to just-drinks today, after the group released its latest half-year results

just-drinks: The big issue in 2018 continues to be the UK's pending withdrawal from the European Union.

Ivan Menezes: We're clearly very close to the Brexit developments. Given our global footprint, and our ability to trade tariff-free in Europe, we can handle Brexit in our stride.

j-d: Associated with Brexit is the possibility of a hard border between Ireland and Northern Ireland. Is this a worry?

IM: We have around 15,000 trucks crossing that border every year, and we have 1,200 people that work on the island. We also have manufacturing operations in both the north and the south, for Guinness and Bailey's. This is also a hugely important export business.

The Irish border is very important. What we want is an open border, friction-less movement across. We think that's really important and very sensible.

j-d: What would the effect on Diageo be of a hard border?

IM: It would add unnecessary cost. It would make it complicated if you slowed things down and had every truck checked at the border. That would add cost and time, and that's something we'd clearly not want.

Then, there are a lot of SMEs that are feeding our supply chain. A big company like us can manage it, but the bigger impact would be on the wider economy and smaller businesses.

On all sides, I think everyone recognises it would not be good to have a hard border.

j-d: In the first half of fiscal-2017, Diageo did quite well out of the devaluation of the pound following the UK's vote in June 2016. One year on, and your reported performance is cycling those higher numbers. Which end of the scale works best for you?

IM: It doesn't matter. We're a business that has to think long term. We always measure our performance on an underlying currency-neutral basis. We don't move on a dime if currency changes, that's why organic performance is our key metric.

Bear in mind that, pre-Brexit, there was a period when the Pound was really strong and that was hurting our earnings. I almost don't look at it!

j-d: There's a very real possibility that NAFTA could collapse.

IM: Again, for us, it's not a substantial worry - we can manage it. We have Tequila coming from Mexico, Crown Royal from Canada. Those are elements of our business.

Obviously, we would prefer free trade. Anything that leads to more frictionless, tariff-free trade is what we want. Anything that comes in the way, we don't like. That said, with NAFTA, we don't expect the impacts to be significant for us.

j-d: Is there a positive benefit for Diageo from the recent tax changes in US that have seen cutting corporate tax rates cut from 35% to 21%?

IM: The change in tax policy has a marginal impact on our overall corporate tax rate. There's so much movement in taxation around the world. Regardless of the tax environment in the US, we are investing there. We've upweighted our marketing investment in the US, we've built the Guinness Open Gate brewery and the Bulleit distillery.

It's such an important market for us, that we'll always be prepared to invest. It's not motivated by the tax change, it's motivated by the attractiveness of that market and its growth prospects.

Besides, on a global basis, our full-year effective tax rate will only move from about 21% to 20%.

j-d: Environmental sustainability has made even more noise than usual since the start of the year. Has this been more reactive than proactive on the part of the drinks industry?

IM: We've been putting some very aggressive stakes in the ground over the last five years, on carbon, water and recyclability. Diageo scores well on global sustainability among producing companies. We're very proud of our track record here.

This is not new for us. I would say we're ahead of the trend, actually.

j-d: Is there more the industry could do?

IM: We're constantly investing in how we can use less water, less packaging, greenhouse emissions. Our global supply organisation is measured heavily on all the key metrics here. We're not waking up to this, we're very proud of the progress we're making.

j-d: What's Diageo's response to the final legal approval granted to Minimum Unit Pricing?

IM: We're working closely with the Scottish Government on the implementation of MUP. We're absolutely committed to promoting moderation in consumption and to reducing alcohol harm.

We also believe that this needs targeted intervention - that's been our belief all along. Broad-based interventions that impact everyone is not right. I mean, 76% of the UK population are consuming within the guidelines. The vast majority of people drink in moderation and drink sensibly. We're all for programmes and interventions that are targeted and deliver changes in behaviour.

At the same time, once governments have made decisions, we get right behind them and we support them. Ultimately, misuse or excessive consumption of alcohol is something we want to stamp out. There's plenty of good growth for this company in people drinking in moderation and drinking better.

j-d: What threat is there to Diageo's high-end Tequila offerings - Casamigos and Don Julio - from Bacardi's takeover this week of Patron?

IM: I don't see an impact. I'm really happy with our position in ultra-premium Tequila - it's a hot category and I think it has a long way to run. Don Julio and Casamigos are both growing way faster than the market, we're gaining substantial share from both brands. There's a lot of runway ahead for both of them.

The beauty of the spirits business is when you get a brand that has been seeded and built the right way, it reaches a tipping point and accelerates. I believe we're going to see that with both Don Julio and Casamigos.

j-d: Can Tequila make inroads outside the US?

IM: It's happening slowly around the rest of the world, but it's small. I believe it will take time, but the interest is definitely building.

j-d: What is Jane Walker going to be?

IM: If we had something to say right now, we'd say it. But, at the moment, we're just reading what you have to say!


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