Good morning, welcome to the Diageo's preliminary results investor Q&A call. Your call today will be hosted by Diageo's CEO, Ivan Menezes, and CFO, Kathy Mikells. Today's conference is being recorded. To ask a question today, please press star one on your telephone keypad to queue up. You may press star two to remove yourself from the queue. We are now ready to start the call. Mr. Menezes, please go ahead.
Thank you. Hello, everyone, welcome to our fiscal 2019 full year results investor call. I have a few opening comments, we'll open it up for Q&A. You'll have seen we've delivered a really strong, consistent set of results. Organic net sales were at the top end of our medium-term guidance range, growth was broad-based across regions and categories. We've delivered organic operating margin improvements ahead of our three-year guidance. We also returned GBP 4.4 billion back to shareholders in fiscal 2019 through dividends and our share buyback program. We're now within our leverage policy target range. Our fiscal 2019 results are underpinned by the ongoing work we're doing to build a culture of everyday efficiency to invest smartly to drive quality growth, and also our ongoing commitment to delivering ambitious environmental, social, and governance goals.
Fiscal 2019 was an excellent year, helped by unusually benign volatility, especially in emerging markets, and by strong innovation performance, some of which is not expected to repeat in fiscal 2020. As I look to fiscal 2020, I expect to deliver organic net sales growth in the middle of our mid-single digit range. I also expect to deliver ongoing operating efficiencies and make a step-up in marketing investment. Our capabilities around marketing investments continue to get stronger, and we see opportunities to invest, including behind new-to-world brands. These will take time to build but will be an important part of our longer-term growth strategy. As a result, I expect organic profit growth to grow about one percentage point ahead of organic net sales growth.
We've clearly got more to do. I'm very pleased with our progress in delivering our ambition to be one of the best performing, most trusted and respected consumer product companies in the world. With that, I'll open it up to questions.
Thank you very much, sir. Again, ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad now. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. Our first question today comes from Simon Hales from Citi. Please go ahead, sir.
Thank you. Morning, Kathy. Morning, Ivan. Thanks for taking the questions. I’ve got a couple really please. Ivan, you talked again there about the step of an investment you’re making in 2020. I think you mentioned in your earlier remarks that there’ll be a focus around the U.S. for that increase in investment. Could you just talk a little bit more about where that uplift in marketing spend will be going in the U.S. and probably perhaps broadly across the wider group? Secondly, just on the FX guidance for 2020, GBP 135 million tailwind to EBIT. I wonder, Kathy, if you could provide a split of that between translation and transactional benefit. Also, as I look forward beyond 2020, I assume that the transactional benefit from FX, given where rates are, will continue into 2021.
I wonder if there's anything you can say in terms of guidance around that. Finally, just on the cash return story, the multi-year cash return story you've outlined today. Should we expect the GBP 4.5 billion over 3 years to perhaps be skewed a little bit more to years 1 and years 2 in order for you to be able to stay within your target leverage range?
Hi, Simon. I'll take the first, and then Kathy can do the next two. In terms of our investment in marketing, as you saw at our Capital Markets Day, we now have a much more rigor and analytical discipline behind understanding the returns on our spend and the effectiveness of our spend. As you point out, we have up-weighted in the last year our spend in both the U.S. and Europe. You could see our reinvestment rates are higher there. Within the U.S. portfolio, we're very targeted around growth. In the period that just finished, you would see up-weight in brands like Crown Royal, Don Julio, some of our Scotch portfolio, Ketel One. Going forward, we still see opportunities to back the big brands, but also to back the brands for tomorrow.
When you look at, for example, and I am saying this globally now, when we look at the gin phenomenon that is happening with, say, Tanqueray in new markets, we want to be in a position to lead that trend and support Tanqueray as it builds in markets like South Africa, Mexico, Brazil, or you look at something like whiskey, which we are now taking out into many more markets. We want to put the backing behind it. The U.S. team has a lot of rigor about how and where to allocate the marketing spend. I would say the shift in nuance is not just backing the big growing brands of today. We also want to back the brands that are going to be important for us three to five years from now. That is what is reflected in how we characterized our guidance for next year.
I'll start with your question, Simon, on FX, where you referred to the impact on operating profit. If I look at that translation relative to transaction, more of the benefit is going to come from translation versus transaction. All I would say with respect to looking out further than 2020 is we do hedge it, what I'd call, on a rolling basis, right? 2021 hedging would be much less than our hedge for 2020 as we stand here today, and I think it's a little early to try and call rates and therefore hedging impacts looking out beyond next year. That's roughly what the split would look like for us.
Overall, I think if we then point to the GBP 4.5 billion in capital returns that we've discussed over the next three fiscal years, I'd start by saying that we were really pleased that we sized the program appropriately in this fiscal year to get back within the leverage range, and that's the EBITDA that Ivan had referenced in his opening remarks. We're now at 2.5 times, and we're looking to operate between 2.5 and 3 times. Overall, the sizing of the program in any given year is going to be targeted to keep us operating within that leverage ratio that we're looking to target. I would say we'll continue to look at all the different ebbs and flows during the course of the year.
Two that I would point out to you most specifically would be FX, which can move Diageo's results, and then how much M&A are we transacting in any given year also just impacts how much surplus capital we have in any given year. Those are the things that we'll take into consideration. Lastly, I would say we will obviously give you an update on the execution of the program as we report results at interim and during the year.
Thank you.
Thanks, Simon.
Thank you. Our next question today comes from Trevor Stirling from Bernstein. Please go ahead.
Morning, Kathy and Ivan. Two questions from my side, please. The first one relating to the buybacks, rather to the cash returns. Kathy, I think you clearly say cash return to shareholders over the next three years, whereas up to now, it's all been 100% buybacks. As you're trying to look at a mix of buybacks and dividends, is that change in policy largely just because the share price is so much higher than it was a couple of years ago? The second question, relating to the second half, there was clearly a slight slowdown, which you warned us to expect. If you look at that slowdown, is there anything that slowed down a little bit more than you expected and anything that slowed down a little bit less than you expected?
Elsewhere, we've obviously given guidance on capital returns over a three-year period, and as you would expect and is prudent, the company is looking to maintain flexibility in terms of ultimately how do we deliver that surplus capital back to shareholders. I wouldn't at all call it a shift in policy. I would say the company is just looking to, like we've given guidance in other areas, maintain flexibility for whatever kind of market conditions and other changes may occur. Then again, we will update you as we execute the program.
Trevor, on the phasing issue, part H2, I wouldn't say there's anything substantial that's changed. If you look at our underlying momentum of consumer uptake across North America, Latin America, across our regions, it's fairly consistent. We had some things which reflect to you. There was some phasing in India where we were mapping the first half was stronger than the second half. There was some things in innovation phasing. As of now, we're not seeing a shift in consumer demand trend any significant in the second half versus the first half.
Super. Thank you very much indeed.
Thank you.
As a reminder, please press star 1 to ask a question. Our next question comes from Sanjeet Aujla from Credit Suisse. Please go ahead.
Hi. A couple of questions from me, please. Firstly, a lot of investment seems to be going into North America and Europe, part of that seems to be coming at the expense of some of your emerging markets. Just wondering, for how long can you keep sustaining that? Is there a risk that you might be under-investing in some of the emerging markets, or are you just investing more efficiently there?
I can take that. Our investment levels in the emerging markets are at the appropriate levels. We have the same discipline of capitalists in looking at the effectiveness of our spend. As we've gone through the last couple of years, we've clearly found a lot of efficiency in our marketing spend. We are buying point-of-sale material better. We've rationalized agencies. Non-working spend has come down. The effectiveness of our dollars has gone a long way. While we're increasing our overall reinvestment rate, there's a big effectiveness surge as well. We're responding to volatility, right? When you have markets that are in tough shape, like in certain parts of Africa and parts of Asia, we are adjusting our spend accordingly. Our core brands and our core markets are being invested in strongly.
I don't see this as a reallocation of advertising and marketing spend from emerging to developed. We look to optimize it for every market, and we want sustained healthy growth across our emerging markets as well.
You talked about benign volatility over the last year in emerging markets, and that's unlikely to repeat. Which markets might you be most concerned about as you look out over the next year?
I wish I knew. If you look at the history, and again, this is one of the strengths of the company, we have a very diverse footprint of geographies across the emerging markets. All I'm signaling is that even in the year we've completed, we've had some tough markets, like Brazil, Thailand, Russia, Nigeria. In the scheme of things, we just want to be in a position that we can handle more volatility. We don't know where it's going to come from. That's really what we want to deliver, is consistency through potentially a higher degree of volatility next year. There's no specific market that we're calling out at this time, but it's more looking at the total geopolitical and economic situation. If we get more volatility, we want to be able to handle it.
Got it. Just a final one on the U.S. You seem to be a bit more optimistic on Smirnoff and Cîroc. Can you just talk a little bit about some of the work you're doing there and how sustainable some of those innovations might be?
Yes. On Smirnoff, I would say I'm feeling good that the total trademark and franchise in the U.S. is stabilizing and improving slowly. It's a big brand, but you can see the trends on equity, past four-week consumption , the quality credentials are all moving in the right direction. Innovation is an element that we're looking to this year with the Zero Sugar Infusions line on Smirnoff going into the marketplace. It's too early to talk. We've been in a few weeks. The base business is in a healthier shape, and so I expect Smirnoff to continue to slowly improve from there. CÎROC is still a challenge. CÎROC, the flavor dependence and reliance makes the brand a little more volatile. I'd say CÎROC is going to take us a few more years to really get to a more stable, resilient position.
Ketel One, we're really happy about. There, the growth is 10%. It's doing really well. Botanicals and the base business are both in healthier shape. Overall, Smirnoff has done well. CÎROC, more to do, and will take time.
Thanks.
Our next question today comes from Fernando Ferreira from Bank of America. Please go ahead.
Thanks. Good morning. A few questions from me, please. First one, on fiscal 2020, Ivan, you’ve been lifting some incredible successful launches, right? Could you comment on how the innovation pipeline looking for fiscal 2020 and beyond? Also, do you see continued runway in some of those successful launches of last year? Second question, I’m curious on your views on the gin category, given how solid it was in fiscal 2019. If the gin momentum in GB and Spain continues to slow down, do you see room for the category to maintain a solid performance in Gordon’s and Tanqueray to continue to do well at a group level? Thank you.
Sure. Hi, Fernando. On the first one, on innovation, one of the things I feel really good about is the sustainability of multi-year growth on innovation that's coming through now in a far better quality way globally. The quality, our innovation is really capability, and our pipelines and how we're executing and getting sustained growth is really a huge step up. If you look at brands like Crown Royal Regal Apple, which is entering its fifth year and is still having really strong growth. As we look at next year, yes, we are lapping a very strong year, but we've also got a strong pipeline. Many of the things we've launched, we expect to continue to grow, and we're backing them and pushing the support behind them. I feel good about the fiscal 2020 innovation pipeline.
It won't necessarily be bigger than last year, but in total, we will see sustained growth, multi-year growth on products we've launched last year and the year before last, et cetera. Feeling good about that. On the gin category, in part, you've got the law of large numbers in some of the big gin markets in Europe. There's still, we see the category as very healthy, and we continue to see good growth momentum in Europe. What's really interesting is we're seeing the gin momentum pick up significantly in many more markets around the world. I alluded to that earlier. We really want to get behind that. Places like South Africa, Mexico, Australia, Brazil, more places in Latin America. The overall trends for the category, we remain very confident about, that we continue to see good growth.
Both Gordon's and Tanqueray are really well positioned to benefit and indeed lead that growth in many of these markets.
Excellent. Thanks, Ivan.
Thanks, Fernando.
Again, ladies and gentlemen, if you would like to ask a question, please press star one. Our next question today comes from Olivier Nicolai from Morgan Stanley. Please go ahead.
Hi. Good morning, Ivan, Kathy. Three questions on my side. You alluded to it earlier, the guidance for full year 2020 obviously is implying a slowdown compared to the very strong performance you had in 2019. In which region or category do you expect that slowdown to be a bit more pronounced? Do you have any evidence of that by looking at actual trends, or you just perhaps prefer to be, I guess, a bit conservative at this stage of the year? That's the first question. You just commented on gin, I had a follow-up actually on this. Very strong growth in Brazil in gin. Well, you highlighted gin. What has been the trigger behind this surge in demand in a market which is not really traditionally a gin market? Do you believe you could see a similar demand in the rest of Latam?
Just lastly, for cash flow, regarding the use of cash, just remind us of your M&A criteria, is there any specific category or region that you are keen to strengthen? Thank you very much.
Thank you. I'll take the first two. As we said, we've been guiding on our top line for this fiscal year, fiscal 2020. It's less about specific regions or markets decelerating. In total, we want just the ability to make sure we can handle, as I mentioned, potentially a little more volatility in the world. We also have innovation, which I talked about earlier. It was very big this year. We will be lapping a bigger innovation number. I wouldn't point to any particular regions having a big shift in trend as driving that. Again, our approach to managing performance in the company to deliver consistency, which is really what we're about, is part of this is creating the capacity for us to move quickly to handle things that turn on us on the external environment.
That's partly behind our philosophy of how we're guiding on this consistent mid-single digit growth going forward. On gin and the off-taking it's had, it's a similar trend, what is happening. In Brazil, for example, it is the early evening occasion. It is in the on-trade. You'll see occasions where young people would have all been drinking beer, and now in that group, you'll see a couple of people drinking beautiful Tanqueray and tonics. A lot of the growth is coming out of there, in where these occasions are developing. Our business there has more than doubled in the last year. So we're very excited about this trend, and we want to keep building upon it, as I mentioned, in many markets outside of Europe.
It is drawing from wine and beer and other occasions in the early evening occasion, which is how it started in Spain and then moved on across Europe as well. It's a fairly similar dynamic at work here.
Olivier, just in terms of M&A, obviously we wouldn't talk about where we might be targeting in advance of actually doing any transactions. The market for M&A, I would say, is quite competitive, we wouldn't be looking to give any competitors any sort of edge in terms of what we might be thinking. You should understand that we're very inquisitive, right? We would look at a lot of things, we will look to acquire things that are both a great fit with our portfolio, that help to position us into new occasions or into areas that, A, either across categories or geographies or price points we under-indexed.
I would certainly point to the acquisition of Casamigos as being very spot on in terms of consumer-backed and looking to make acquisitions in areas where we think we're just not fully participating in the growth opportunity that's there. That's obviously an acquisition that we're really pleased with. We had under-indexed in tequila, and specifically were looking for something in super premium tequila that could sit alongside of Don Julio, which is also very well performing. Both of those brands are very well performing for us, and tequila was up 29% in the last fiscal. We'll continue to be very active in looking. The other thing I'd say is we're obviously also organically launching new brands of our own. One that I would point to that we've just launched recently is an Italian premium gin, Villa Ascenti.
That's something else that will continue to append to our overall portfolio of brands. The last thing, I would just refer back to Ivan in terms of, we need to both be investing in the big brands in our portfolio today, but also seeding those investments for the future to make sure that our portfolio continues to be very strong as we look forward, over the next five to 10-year period. We're doing just that, and that's part of the reason that we point in fiscal 2020, to continuing to look to upweight our marketing.
Perfect. Thank you very much.
The next question today comes from Lawrence Leeds from Barclays. Please go ahead.
Good morning. Thanks very much for the question. Firstly, on the margins, you've had a significant improvement in the margins over the past three years, and it's almost double what the initial margin target was. How do you know that you are not cutting margins too much? We've had a number of other consumer companies that have made that realization, only having to reinvest back into the business. Secondly, as a bit of a follow-on to Fernando's question, on the innovation. The Scotch markets you've highlighted have all benefited significantly from the Johnnie Walker White Walker line extension. Whilst I appreciate that you want to get multi-year growth out of your innovations with the end of the "Game of Thrones" TV series, can you still continue to be able to grow that particular product?
Finally, on Captain Morgan brand, you mentioned in the U.S. that you need to do more to get that brand out of decline. Could you let us know what plans you have for the Captain Morgan brand? Is that just innovation or marketing, or what are you looking to do there? Thank you very much.
Sure. Kathy, why don't you take first, and I'll take the next one.
Sure. I'm happy to start with margins. I think it's important that you step back and think about the sustainable model that Diageo is trying to drive. We talk about everyday efficiency and driving that. That really gives us kind of the fuel for growth to smartly invest back into our brands, into technology, into consumer experiences, which then enables us to drive kind of consistent underlying quality growth. If you look at what we've done over the last three-year period, over the last two years, our marketing investment rate's gone up by 50 basis points. Over the three-year period, I'll call it roughly 30 basis points. Unlike, I would say, some other companies within CPG, we have not at all been looking to, I'd say, kind of harvest or shrink A&P and marketing investments. Kind of quite the opposite.
We see great opportunities to invest in the business, and we're getting smarter and smarter about those investments because we've got much better data and information to tell us what those investments are going to earn in terms of a return, both across brands, across our different geographies and within a brand, what we would call across different growth drivers. We're able to actually look at, even when you get into things like media spend, how can we best spread it over the course of a week in a season, et cetera. I'd say we're quite smartly targeting that investment, and we're absolutely continuing to increase our investment back into the business.
I would just have people recollect that three years ago, when we started down this journey and we originally gave margin guidance, we talked about the fact that the everyday efficiency benefits that we were looking to generate, we were looking to reinvest about two-thirds of that back into the business, and we've certainly accomplished that. We're absolutely looking to manage the business for the long term, for consistency and stability. You see that by how we're investing back in the business.
Thanks, Kathy. On innovation in Scotch, just a few points. One is, we were really pleased with Scotch performance this year, not just because of innovation. Core business, malt business, Johnnie Walker core, I mean, Blue Label was up strongly. Buchanan's was in stronger shape. Our brands, Old Parr in Latin America is doing much better. Scotch is stronger. Now, clearly, the team has been on to this for a long time. How do you lap White Walker? We've got a strong pipeline of innovation in Scotch for fiscal 2020. What the White Walker innovations have done is recruited new consumers into Johnnie Walker and made Johnnie Walker cooler. The equity measures have moved.
You will see in our marketing on Johnnie Walker, which I'm really excited about as we roll out in fiscal 2020, we've got some very exciting brand building and marketing on Johnnie Walker coming up. I believe we will, in total, Scotch and on Johnnie Walker, we'll be able to continue and sustain the momentum we enjoyed this year, where Scotch grew 6% and Johnnie Walker grew 7%. Captain Morgan is a tougher challenge. The rum category has been challenging for the most part of the past decade. The category is in decline. In the U.S., we've got a huge amount of focus on this brand to improve the trajectory. It's a big brand, it will take time. The core direction is to be recruiting against a broader demographic, the multicultural consumer base in particular. I'm really excited.
A few weeks ago, we announced the major sponsorship on Major League Soccer in America, where Captain is. The whole ambiance of what's happening in soccer in the U.S. is fantastic. A very multicultural dynamic, a much more fun environment, unlike some other sports that have become way too corporate. Captain stands for fun, and we are really going to be building that brand. It's only one of the pillars. On MLS in the U.S., we're also upkeeping the marketing, and we have some more exciting ideas still at the early stages on innovation. I just point you to the work we've done on Smirnoff, on Baileys, on Ketel One. In the spirits business, it's not easy to get a quick turnaround, but with the right quality of work and investment, we do believe we can get Captain Morgan into better shape in the U.S.
Outside the U.S., the brand is in growth, and I believe we can actually grow it even faster outside the U.S. The plans for fiscal 2020 do have a refreshed approach to marketing and innovation, which we feel good about.
Great. Thank you very much.
Our next question today comes from Nico von Stackelberg from Liberum. Please go ahead. Apologies. We now have Andrea Pistacchi from Deutsche Bank. Please go ahead, sir.
Yes, good morning. I have two questions, please. First one is on pricing in the U.S. Deirdre, at the Capital Markets Day, I think she was saying there are some signs of improvement in U.S. pricing. Now, when you look at Nielsen, though, when you strip out mix, it shows that pricing is still pretty limited or subdued except maybe in tequila. I appreciate, obviously, Nielsen isn't always precise. How do you feel about the pricing environment in the U.S.? Is it improving at all, in your opinion? Secondly, a question on GB. You had two very different sort of halves. H1, very strong. H2 was softer, partly reflecting, I think you say in the press release, commercial negotiations following price decisions.
Can you say what is happening, please, in the U.K., and also how do you feel about the outlook for the U.K., given what's going on in the country? Thank you.
Sure. Hi, Andrea Pistacchi. On pricing in the U.S., if you look at U.S. PPI, it's running between 2% to 2.1%, spirits is running about 0.8% if you look across Nielsen and NABCA. I do expect the U.S. spirits pricing environment to get better slowly. We are clearly, depending on the categories, and tequila and whiskey and our higher-end brands are getting price. You've got categories like rum and vodka, which are much more competitive and tougher. I would expect gradual improvement over the next few years in pricing in the U.S. spirits environment. That would be my comment on U.S. pricing.
Overall, I think if we look at GB, we have been looking to improve our overall approach with regard to net revenue management, and the pricing actions in GB were all about us looking to cover more of inflation. We're looking to do that in more places across the globe to set us up for kind of quality growth going forward. I'd say as we look at off-trade in GB, that continues to look strong, and we would expect our results in GB to improve over time relative to what we saw in the second half. On a full-year basis, GB was still up 4%, so we felt pretty good about the performance there. gin continuing to be quite strong still in GB.
Feel very good about the Guinness brand performance. The Guinness brand is in really good shape in G.B. and continues to do very well.
Thanks. The weaker second half is much more a reflection of these commercial actions around price increases rather than a sort of softening consumer environment, right?
That's broadly correct. We're not seeing any signs, to your question about the current environment in GB. There are some channel shifts in the last few months, but we're seeing the on-trade strong for us. A little more weakness in the off-trade, but nothing major overall pointing to a big change in trend.
Thank you.
Ladies and gentlemen, apologies. We now have Nico von Stackelberg from Liberum. Please go ahead.
Hi there. Yes. A question on your growth rate for gin in Spain. What was it, and how did it compare to the industry? There's a lot of growth in flavored gins right now, and that led to flavor fatigue in the vodka category. Do you think that's a fair comparison for gin? Why or why not? Just a quick one for Scotch. Are you guys planning for growth in your Scotch portfolio for FY 2020? Finally, the last one's for Kathy. Kathy, I'm still intrigued by the fact that interest income was GBP 232 on average cash of GBP 903. That's 25% and some change, which is 13% of your earnings. I appreciate a lot of the cash is in emerging markets, but what's the real rate on your cash, and what's your ability to get to cash if you need it?
Is it easy to repatriate if you need to do so?
Okay. Why don't I start with the last question, and then we'll kind of go back up to the beginning for you. The place in the press release that you're looking for our interest income in, it also reflects kind of swap gains. The swap gains make the interest income look outsized hence your calculation of 25%, which I would just loosely say is not the return that we get on actual cash sitting in bank accounts across the globe. Overall, I would say we definitely earn a little bit higher interest rate on cash because more cash sits in emerging markets than it does in developed markets. We have quite good processes for how we extract cash out of emerging markets at the time. We don't have any significant trapped cash anywhere. Hopefully that addresses your question.
I think we'll come back a bit, Ivan, to kind of questions about gin overall and what's happening in Iberia.
Yeah. The gin business grew nicely in Iberia, mid-single-digit for us. Your question on flavors, we do not see, and again, we are very careful about how we think about flavor proliferation. Our goal in line extension is very much to recruit new consumers, not to trade existing consumers within the franchise. The terrific success we had with Gordon's Pink, if you look at what that has done, it has really, as I talked about earlier, brought in consumers from outside the gin, indeed outside the spirits category, into the spritization in the early evening. The taste profile and the color and the deliciousness of the drink has been drawing, particularly in the on-trade. It's been an amazing success. We don't intend to do multiple flavor proliferation in the gin category. On Tanqueray, we're being very disciplined.
Tanqueray Sevilla, which is also off to a strong positive start, Tanqueray Rangpur are two of our core offerings. It's generating more interest. It's offering consumers more approachable, refreshing drinks. If you went back a decade to the proliferation in vodka, it was overdone, and it was all trading within vodka. What we're doing in gin is actually still, there's a lot to go after to bring in new consumers into the category. By the way, on Spain, we are gaining share, the gin category is plateauing. The overall gin growth category has slowed down, we are gaining share with Tanqueray and Gordon's.
I think the last question that you asked was just about scotch kind of overall, and how are we thinking about scotch in fiscal 2020. I would just start with, we don't specifically give guidance on particular categories or particular brands in a given year. Scotch is obviously 25% of Diageo's top line. Yes, we expect that scotch is going to be in growth next year.
All right. Wonderful. Thank you.
Thank you.
Ladies and gentlemen, as a final reminder, please press star one to ask a question. Our next question comes from Edward Mundy from Jefferies. Please go ahead.
Morning, Kathy. Morning, Ivan. A couple from me. First is on North America. Ready-to-drink growth has been quite strong in fiscal 2019. The category seems to still have quite good momentum. How do you see your performance over fiscal 2020 with the like of Smirnoff, hard seltzers, and Smirnoff Ice Smash? The second is a political question coming back to sort of volatility. I appreciate you don't have a crystal ball on potential tariffs, but is there anything you're able to share at this stage on what the potential gross cost could be if there are higher tariffs on some of the European imported spirits into the U.S., perhaps commensurate with what happened to American whiskey into Europe? Are you able to print a 5 to 7 organic EBIT number if those tariffs do materialize?
I was wondering whether you're able to share how do you think about either swallowing the cost of those tariffs or passing them on by given the importance of trying to get scotch going within the U.S.?
Sure. Ed, I'll handle tariffs, or I'll take both quickly. RTD, the seltzer phenomenon is extraordinary in the U.S. We are riding it and benefiting, as you can see in our RTD profile. I think my direction to the team is, don't get caught up in it, right? We don't know when these things turn. We're much equally focused on building our beer business in a very solid way there. I'm encouraged by what we're seeing in terms of consumer trends and equity shifts on Guinness. We're riding the RTD trend, but we're certainly not counting on it being a long-term sustained trend, and we really don't have an ability to predict that. We've seen the cycles of the past 20 years, so I'm cautious on it.
On volatility and tariffs, it's too early to see how this aerospace dispute will play out. A lot needs to happen in the next few weeks and months. We obviously have a set of scenarios around various assumptions. I would say, we will not be immune. There will be a short-term impact if tariffs happen, and I'd prefer at this stage not to guess the impacts of them. Clearly, we are tracking the space, and we'll handle it and communicate it as and when things happen. Diageo's strength, again, is we have a broad base of business, right? Our U.S. business is very diversified in terms of where our products come from in the U.S., including a lot of it locally sourced. We do have good experience in managing volatility, and that's part of what I alluded to in my earlier comments.
That's what we want to make this company strong and ability to handle some of the things that may come our way in any particular year. That's what I'd had to say on the tariff front.
Ivan, to push you further on that, some of the back of the envelope maths I've done suggest that potential gross impact of maybe GBP 40 million or 1% of your EBIT. If that was to materialize, you would still be able to deliver growth within your medium-term guidance range of 5%-7%. Is that a fair assumption? Be able to comment on that?
I think you've run some numbers. I won't comment on, because till it happens, Ed, we are ready and we've done our modeling. I'd say there's still a lot of developments that need to happen in the next few weeks and months. Our overall guidance does in fact reflect the fact that we want to be prepared for a little more volatility in the world.
Thank you.
Ladies and gentlemen, we have no further questions at this time. I would like to hand back over to your host for any closing remarks. Thank you.
Well, thanks everyone. Appreciate your interest in the company. Kathy and I will be out in the next week and look forward to seeing and meeting many of you tomorrow and next week. Have a good summer for the rest of summer. Thank you very much.
Thanks, everyone.
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation today. You may now disconnect.