Paul S. Walsh - Chief Executive Officer and Executive Director Deirdre A.

Mahlan - Chief Financial Officer and Executive Director

Good morning, and welcome to our interim results webcast. Deirdre and I are going to speak for about 40 minutes on the key highlights of these results.

At 9:30 this morning, we will host a teleconference to take your questions when Deirdre and I will be joined by our executive colleagues. We're at the midpoint of our 3-year medium-term guidance period that we set out in August 2011, and the results for this half show that we are on track, and that the strategy we articulated on making a strong business stronger is doing exactly that.

The key drivers of our top line growth are robust; volume growth in the faster growing markets; price increases which more than cover our COGS inflation; strong growth of our U.S. spirits business, reflecting an improved pricing environment there; and strong growth of our reserve brands.

The breadth of our business across markets and categories ensures that despite some specific market challenges and volatilities, Diageo's overall performance is strong. We delivered further margin expansion.

The biggest driver was gross margin expansion, the results of our pricing and premiumization strategy. We are reaching critical mass in the faster growth markets, and our focus on organizational efficiency also contributed to the over 100-basis-points operating margin improvement that we delivered.

We continue to invest in our brands. And you'll hear later, we are investing more on media, including upweigting digital spend, and we're funding this increase through capturing efficiencies on below-the-line spend.

The key measures of performance are strong: 9% operating profit growth; 9% EPS growth; and stronger cash flow. This first half performance, together with the strength of the underlying brand and market trends, which Deirdre and I will now describe, give us the confidence to increase the dividend by 9%.

Now this is the third time that we've improved the rate of dividend growth since we gave our medium-term guidance. And with that, I'll hand over to Deirdre to walk through the results in more detail before coming back to share with you some additional perspectives.

Thank you, Paul, and good morning. As Paul said, our half year results again demonstrate the success of our growth strategy.

Focus on the strategic brands, on our strength in North America and the increasing presence we are building in the faster growing markets of the world is driving strong top line growth and margin improvement. I'll quickly recap the key performance measures before I go into the detail.

Net sales grew 5%, with price/mix the biggest driver. Price made the biggest contribution.

Mix impact was limited because despite our strong growth of our reserve brands, up 18% in the half, the weak performance of the Korean scotch market negatively impacted mix. Price, together with procurement savings and the efficiencies we've made in our supply footprint in Scotland, Ireland and North America, drove gross margin expansion of 70 basis points.

And that 70-basis-point gross margin improvement, together with the GBP 25 million savings from our operating model review, produced organic operating margin expansion of 110 basis points during the half. We generated strong organic operating profit growth.

The 9% growth, together with a modest rise in finance charges, drove a 9% increase in pre-exceptionals EPS. Our free cash flow was GBP 700 million in the half, up more than GBP 125 million from last year, showing the strength of our business across the markets.

Now I'll move on to the detail underlying our results. We'll start with volume growth.

We produced an overall volume increase of 1%, driven primarily by an 8% increase in strategic brands in faster growth markets. North America volumes also increased despite higher pricing.

These increases were largely offset by weaker trading volumes in Western Europe. By category, scotch and vodka were the key drivers.

By brand, Johnnie Walker and Smirnoff led the way with the biggest volume growth. We increased North America volumes by 1%.

In the U.S., our focus is on the strategic brands. Marketing and innovation were big contributors to growth.

The most successful launches were the 2 new Smirnoff confectionary flavors, Iced Cake and Kissed Caramel and Crown Royal Maple Finished. The volume decline we saw in Western Europe is the result of the continued weakness in Southern Europe and France.

Volume decline was substantial in Spain at 20%. That was mainly due to customers destocking about 3-week sales.

Volume in France also declined over 20%. The decline in France combines both the impact of last year's customer buy-in ahead of the excise tax increase and the decline in consumption following that tax rise.

So volume in Western Europe overall was down 5% despite very solid double-digit increases in the Netherlands and Germany. In developed Asia, Korea was down 19% as the whiskey category contracted at an accelerated pace in the half.

Diageo's stronger pricing there led to a loss of share. Net sales growth was 5%, driven by 4 percentage points of positive price/mix.

The faster growth markets drove the majority of our price/mix benefits, delivering 14% net sales growth there. We got a 2% to 3% average headline price increase across the spirit portfolio in North America.

And those price increases, together with favorable mix from the stronger performance of super premium brands such as Cîroc, Johnnie Walker and Buchanan's, led to 4 percentage points of positive price/mix in our biggest market. So North America drove 30% of our total net sales growth and more than 30% of our price/mix.

In Western Europe, net sales declined 5%. That was the result of soft volumes and increased price competition, as well as negative channel and country mix.

And that was despite 7% growth in reserve brands in Western Europe. The double-digit decline of net sales in Korea, being in a big scotch market, drove negative mix.

Price increases we put through in Australia, together with the double-digit growth of beer and vodka in Japan and Korea, did not offset the scotch decline in Korea. Reported net sales were up 5%, in line with organic net sales growth.

The 2 percentage points of growth from our recent acquisitions was offset by negative exchange because almost all currencies weakened against the pound. All 5 regions delivered positive price/mix during the first 6 months.

Negative gearing in Western Europe was more than compensated for by positive price/mix in the faster growing markets of Eastern Europe and Turkey. Nearly 90% of the positive gearing was a result of more confident pricing across markets.

North America and Latin America made the biggest contributions to mix, and scotch was the biggest contributor by category. Net sales from acquisitions are Shui Jing Fang in China, Mey Içki in Turkey, Meta Abo in Ethiopia and our latest acquisition in Brazil, Ypióca.

We started to consolidate the results of Shui Jing Fang this period as we gained de facto control of the company at the end of last year through our step-up acquisition. Two months of Mey Içki's performance were accounted for as an acquisition because, as you'll recall, we acquired the company at the end of August last year.

As you know, marketing represents our most significant investment. We invest strongly and consistently behind our brands.

Our goal is to enhance our brand equities and drive future growth. Again this half, marketing spend was up 5%, right in line with net sales growth.

For several years now, we have made significant investments to target consumers in the faster growing markets. But 2 years ago, we accelerated the pace of those investments.

This half, marketing spend in faster growth markets was again up double-digit. We are targeting our investment at driving growth in our scotch and reserved brands.

In China, we are achieving more critical mass. Investments, such as the 2 Johnnie Walker Houses, allow us to streamline our sponsorship platforms.

In North America, our focus is on delivering further efficiencies in marketing investment. These efficiencies have supported significant increases in media spend behind brands such as Ketel One vodka, Cîroc and Bulleit Bourbon.

We have also increased our investment behind gin and super premium tequila. Don Julio had its first ever through-the-line summer campaign, which, together with a new gifting platform, drove 9% net sales growth for the brand.

Since we changed the operating model, marketing and back-office functions in Western Europe are conducted centrally. The centralization of activities has allowed us to improve the effectiveness of our marketing spend there.

We also moved spend from the declining scotch category in France, Greece and Spain to other categories. We're supporting gin in Spain and increasing spend in other markets, like Germany and Benelux, where we still see growth potential for our brands.

We reduced marketing in Korea, in line with the net sales decline in scotch, but we increased our spend behind vodka and beer there. In Australia, we spent more on marketing for gin and rum as we recruit new consumers to those categories.

Turning now to margin. Gross margin improved on an organic basis by 70 basis points, reflecting pricing and mix improvement delivered by the growth of scotch and reserve brands.

Input cost inflation of 4% has been partly mitigated through procurement savings of around GBP 50 million together with production efficiencies from the footprint changes we implemented in the last few years. That's particularly true in North America with our new high-speed packaging lines at Relay and the new rum distillery in the U.S.

Virgin Islands. And as a result, cost of goods sold per unit increased by only 2%.

I expect the same level of increase for the full year. During the half, we got an operating margin benefit of 10 basis points from marketing spend, but I expect this to reverse in the full year as some of our investments are phased into the second half.

We continue to invest in our faster growing markets, but as we reach scale in some of these markets, overheads as a percentage of net sales start to reduce. Margin also benefited from some GBP 25 million savings from the operating model review.

However, overheads rose as a percentage of sales in Western Europe, which held back operating margin improvement to 30 basis points. In summary, we have increased our gross margin and delivered overhead efficiencies while investing in the long-term growth of the business.

We delivered free cash flow of GBP 708 million in the half, an increase of more than GBP 125 million from a year ago. Higher operating profit and the earlier receipt of the interim dividend from Moët Hennessy were the main contributors to the increase.

Together, they drove more than GBP 250 million of incremental free cash flow. The increase in our working capital reflects the continued investment in maturing stock to fuel our future growth in scotch, partially offset by lower debtors, including lower overdue debt in Western Europe which we achieved through strict management of debtors.

Higher interest payments were driven by the impact of the renegotiation of certain interest rates swaps in the prior period, while lower tax payments are a result of tax settlements last year. CapEx spend was GBP 271 million during the half.

That GBP 271 million reflects investments in capacity in Africa, in efficiencies in North America and Ireland and additionally, in our acquisitions in China and Ethiopia. We will continue these investments, so I expect CapEx for the full year to be above GBP 600 million.

As a result of the strength of our free cash flow and current favorable financing conditions, we decided that we will make a contribution of GBP 400 million to the principal U.K. pension scheme.

This contribution will substantially reduce the current deficit and will reduce volatility from the group's post-employment plans. It will also have a slight EPS benefit.

Despite the increased CapEx spend I just described, I expect full year free cash flow to be only GBP 400 million below last year's cash delivery, entirely driven by the pension contribution. Now moving down the income statement.

Reported operating profit was up 9%, in line with the organic operating profit growth. Negative foreign exchange of GBP 41 million and GBP 29 million of acquisition transaction costs were offset by the operating profit of our recent acquisitions.

The strength of sterling has a more muted impact in the second half. So for the full year, we estimate that the adverse FX movement will reduce operating profit by approximately GBP 20 million.

Associate income was up GBP 6 million, driven by the improved performance of Moët Hennessy but partially offset by Shui Jing Fang moving from associate to subsidiary. Net finance charges and noncontrolling interest remained broadly flat.

The reduction in average net debt helped to offset the 20-basis-point increase in the effective interest rate as we moved to a higher proportion of fixed debt last year and as we increased the level of local borrowing, supporting our expansion in the faster growing markets. I expect the effective interest rate to stay at 4.9% for the rest of the year.

Operating profit was up 9%. And EPS, excluding exceptional items, was also up 9%.

As a result of the investments we have made in the past few years, the faster growing markets now make up 40% of our total operating profit. North America remains our biggest region, driving top line growth and margin improvement.

The challenges of Western Europe are reflected in its declining weight, and the most troubled Southern Europe markets now contribute only 5% of the group's operating profit. So as Paul said right at the start, Diageo is a strong business getting stronger.

We are strengthening our position as the world's leading premium drinks company with world-class marketing and innovation, stronger routes to market and by making acquisitions in the faster growing markets. We are increasing our investments in those brands and markets that we believe will drive growth.

Our businesses are driving efficient growth through our pricing strategy, improved mix and operating efficiencies. Our financial strength and consistently strong cash flow is a real source of competitive advantage.

That strength gives us confidence in our 9% increase in the interim dividend and, as Paul said earlier, our ability to reiterate the medium-term guidance we've given you. This is a strong set of results.

For the second half, I expect continued strong performance from the faster growing markets and from the U.S. I remain cautious and do not expect a material improvement in trading conditions in Western Europe.

Whilst in Korea, I expect some improvement as the price increases we implemented have now been followed by the competition. In support of this, marketing spend in the second half will grow at least in line with net sales growth, while incremental overhead savings from the organization review will be lower in the second half.

However, operating margin will continue to benefit from the pricing we have taken and from our supply cost efficiencies. And now I'll hand you back to Paul.

Thank you, Deirdre. As you've seen in these results, we continue to focus on the 3 pillars of our strategy: investing in our brands; improving our routes to market; and expanding our presence in the faster growth markets.

And they have shaped our half year performance. And I'd like to focus on 3 themes: continued delivery of net sales growth, particularly in North America and the faster growth markets; expansion of our gross margin and operating margin, driven by pricing, mix and continued delivery of operational efficiencies; and finally, our investment to maintain these trends and how we will continue to access new markets and new consumers, both organically and through our targeted acquisitions in the new wealth-creating economies.

Including the impact of our recent acquisitions, we increased reported net sales by over GBP 300 million. That's a clear demonstration of the organic and inorganic growth opportunities which Diageo can deliver.

Growth from U.S. spirits, the faster growth markets and global sales of scotch have enabled us to offset the challenges we faced in Western Europe and Korea.

It is a mark of the strength and breadth of this company that we can absorb these setbacks and still deliver strong net sales growth. For me, one of the highlights of these results is the strength of our performance in North America.

I've always thought of this region as our biggest developing market. It contributed over 30% of our organic net sales growth, driven by 6% growth in U.S.

spirits, a rate which we believe outpaces industry growth by more than 1 percentage point. It is a growth market, and demographic trends in North America will only improve this growth potential.

Our growth drivers are a balanced combination of volume growth, price and favorable mix. We capture the big growth opportunities.

If you look at our performance in vodka this half, you can see what I mean. Our vodka net sales grew 9% as we continue to premiumize the category, our core brands of Smirnoff, Ketel One vodka and Cîroc all driving category growth.

We delivered double-digit growth in whiskey. We grew Crown Royal 12%, boosted by our Maple Finished innovation, and we doubled net sales of Bulleit.

We are in a good position in American whiskey, and we are growing our business strongly. We've made a significant uplift in media spend to capture growth.

As Deirdre said, whilst headline marketing spend is up 5% in line with net sales, we have increased investment in consumer-facing media at a much faster rate. And we're funding that investment through driving efficiencies in other areas of spend as we drive scale and standardization, for example in point of sale materials.

We're all now getting familiar with the innovation machine that Diageo North America has become. This half, we launched a number of industry-leading innovations in spirits, as well as 5 major wine launches that drove our wine business back to growth.

It is a mark of the strength of this business that we've been able to achieve all of that whilst significantly improving an already high operating margin by more than 100 basis points. Clearly, driving price/mix has been a key factor, but we've continued to drive efficiencies across the business, both in marketing spend and as I alluded to earlier, as well as in our overheads as we embed the new operating model with increased accountabilities in our distributor partners.

We deliver the bulk of our top line growth through our performance in the faster growing markets, especially in scotch. So I'm going to talk about our increasing presence in these markets and our leadership in scotch.

We delivered almost 60% of our total sales growth from scotch. And Johnnie Walker in these markets was the biggest single contributor, up 18%.

Our continued success here combines 2 complementary strategies, tailoring and extending our offer to the middle-class consumer whilst continuing to premiumize our offering for the luxury consumer. The growth of the middle class in the faster growth markets gives us our biggest growth opportunity.

These middle-class consumers aspire to our established premium brands. So the first opportunity we have to access this consumer is with our existing premium brands in their existing formats.

This has been the driver of growth of Johnnie Walker Red Label across Latin America in the last 10 years. But increasingly, we are looking at new ways to bring our premium brands to these middle-class consumers.

And there are 2 key ingredients to unlocking the growth that, that represents: the right consumer offering and the right route to market. A great example of the right consumer offering is the Step Up campaign in Africa.

In Africa, we've focused on 13 key cities in 10 countries to drive the growth of Johnnie Walker. Approximately 10 million new consumers have been introduced to Johnnie Walker in just 2 years.

Recruitment of these consumers was driven through a locally-tailored Walk With Giants campaign and through Johnnie Walker mentor programs to educate consumers about the provenance, heritage and credentials of the brand. That consumer reach has been amplified by the Step Up campaign.

We focused on recruiting consumers from premium beer with a three-pronged strategy: utilizing our existing beer route to market to penetrate traditionally strong beer trade outlets; implementation of at arm's length pricing driven through the 20 centiliter format; and through a customer education program focused on executional excellence. As well as great marketing and product executions, we can accelerate growth through improving our route to market.

This chart demonstrates the change in our growth trajectory when we took our spirits brands back from third-party distributors and moved them to our in-market companies. We had grown the Johnnie Walker business in Africa on average 8% between F '04 and F '10, a good performance.

But by bringing distribution back in house, enhancing our routes to market and focusing on our marketing campaigns, we've driven 33% growth in the last 2 years. In half 1, we accelerated the pace once more.

Johnnie Walker delivered net sales growth of nearly 40% across the region. Now to the second strategic focus area, delighting the consumer of luxury goods.

Let me give you just a taste of what we've done. This image shows Johnnie Walker Odyssey.

This is a rare triple malt which commemorates the vision and enduring entrepreneurial spirit of Sir Alexander Walker. And to promote it, in September, we launched John Walker & Sons Voyager, a luxury yacht commemorating the journey of the Walker family from Scotland to the 4 corners of the world.

The first Odyssey Voyager event was in Shanghai, a 3-day celebration which reached 800 trade, media and consumer VIPs. That Shanghai event gave us a total media exposure that would have cost around GBP 3 million, as well as opening up 200 new distribution points for Johnnie Walker.

Aiming even higher, the Signature Blend is the pinnacle of Johnnie Walker. With a minimum price tag of GBP 80,000 per sale, invited guests are given the opportunity to meet with the master blender, who works with them to identify their individual taste preferences and handpicks whiskeys accordingly.

Every element of the Signature Blend offering is personalized for the individual, from the scotch itself to the luxurious decanters and gift boxes. The Signature Blend could deliver GBP 700,000 in net sales by the end of fiscal '13.

Leading in scotch is not just about Johnnie Walker. We have a strong position in malt whiskey, where net sales are growing 13%.

We've focused investment on 2 lead brands, the Singleton and Talisker. Both grew over 20% in the first half.

Singleton was launched in 2006 and is now the fifth biggest malt brand in the world. Talisker is much more established, but we've increased our focus on the brand.

We now have Talisker Atlantic Challenge, which is driving a huge amount of PR globally. With the iconic position of Talisker distillery, the "Made by the Sea" positioning is strong and it's simple to execute.

Moving on to focus on margins. Now I'm going to expand on 3 points that Deirdre touched on earlier.

As you saw, we delivered 4 percentage points of price/mix, and our price/mix was positive in every region. But as you can see from this slide, pricing is a key driver of our price/mix improvement.

At a total Diageo level, nearly 90% of our price/mix is driven by our pricing strategy. Latin America and North America both delivered strong mix improvement during the half.

And we'll continue to focus to drive mix improvements market by market. However, in this half, our stance on price enabled us to cover some market mix deterioration and drive gross margin expansion.

We've increased our marketing as a percentage of net sales by 120 basis points since fiscal '09. Now in my view, there is no magic number for the marketing reinvestment rate but I'm broadly comfortable at this level.

What you can expect though is that we will drive the effectiveness of our marketing spend. For example, this year in the U.S., we have driven standardization of our point-of-sale materials and achieved procurement benefits.

We have redeployed this saving to consumer-facing media. We wanted to drive a material uplift in consumer-facing media across our strategic brands but without increasing overall investment rates.

We rationalized point-of-sale vendors and products massively from hundreds of suppliers to 3. And we centralized the spend and automated the purchasing process to make it easier to use.

In doing that, we got the same or better quality POS for a 14% reduction in spend and we were able to increase media spend by 25%. Now this is a theme that you'll be seeing more and more in other regions.

As Deirdre said, we reduced overheads as a percentage of sales at a total level. But we are continuing to invest to build our business.

Our North American business already has the lowest overheads as a percent of sales. That's driven by the scale of our business and the efficiency of our route to market.

I'm comfortable with the level of investment we have in this business and the returns that we're driving from this investment. In Europe, we reduced overheads by 1 percentage point, but the decline in net sales in Western Europe does mean that there was a small 20-basis-point increase in overheads as a percentage of sales in the region.

In developed Asia, we structured our operations in both Australia and Korea to drive margin. In the faster growth markets, while we've improved margins, we've also invested for future growth.

For example, in Latin America, our new logistics operation center in Panama is fully operational and will handle 2 million cases. Now that reduced lead time from 60 days to 2 weeks and it's reduced inventory.

In African regional markets, we've increased investment by 30% as we continue to grow our established businesses in Cameroon and Ghana and invest in the integration of Meta Abo Breweries. And we've started to invest ahead in the newer Southeast Asia markets, with a view to building a sustainable Diageo presence in the next-wave markets such as Sri Lanka.

Turning now to my third theme, laying the foundations that will support net sales growth and allow operating margin expansion to continue. First, route-to-market improvements.

We've continued to invest in strengthening our already strong routes to market across the world. In Brazil, we executed Phase II of our route-to-market strategy, covering the next 20% of the country and deepening our access to medium-sized outlets.

Ultimately, this will take us to a network of 50-or-so high capability distributors in place of the large numbers of wholesalers we've previously operated through. In Africa, we added around 80 salespeople in Nigeria and created a new reserve team in South Africa.

In Asia, we're expanding to Tier 2 cities in India and increasing coverage in Indonesia. And in North America, F '13 is the first full year of route to market mark 2, where we significantly expanded the number of dedicated wholesaler resources selling our brands and transferred additional accountabilities to them.

Enhancing our route to market in the fast-growing economies is at the heart of our acquisition strategy, and we've made 5 important acquisitions in the last 2 years. The biggest was Mey Içki, the leading spirits company in Turkey.

Just over 1 year into their operations as part of Diageo, I have to say that I'm extremely pleased with the performance of Mey Içki. As I'm sure you know, Turkey's economic activity slowed noticeably in 2012 following 2 very strong years and the raki market volume contracted by around 9%.

Against that backdrop, Mey Içki raki has maintained its strong leadership position and held share of 85%. In addition, we're already seeing the impact on our international spirits brands of Mey's advantaged distribution channel.

Diageo's scotch volume increased, and our value share grew to nearly 50% from 20%. This performance is driven by Mey's strong observation network and our increased marketing support behind this better route to market.

All our acquisitions follow the same model: great local brands, which are growing through premiumization, and access to enhanced routes to market for our international brand portfolio. More recently, we announced agreements to acquire controlling interest in the leading spirits company in India.

The transaction is subject to regulatory approval and certain other conditions, but when completed, it will be a significant milestone in Diageo's strategy to build our presence in the world's fastest growing markets. Before I wrap up on acquisitions, let me say a word on Cuervo.

I am somewhat disappointed that we were not able to acquire the Cuervo brand. I admire the brand, I've known it many years, and I admire the family.

But ultimately, buying the brand through the transaction available to us would have been the wrong decision for this business. Our shareholders will be much better served by our organic entry into this category, and I hope we'll be able to reveal exciting details later in the year.

Finally, let me assure you that there is plenty of wind left that in our sails. Enhanced route to market, the increasing number of middle-class consumers, leadership in scotch and our pricing strategies can access new consumption occasions and deliver top line growth.

At the end of this webcast, I would like you to look at a commercial for White Horse in Brazil, which leverages our new distribution into new outlets. It creates a bridge between the beer consumption occasion and the more status-driven world of scotch.

We've expanded our market activity into bars and outlets that primarily sell beer and cachaça. The key part of this activity is a 40-ml shot serve called El Cavalinho, the small horse, priced the same as a bottle of beer.

The ritual fits comfortably alongside beer consumption. Its name also perfectly links to Brazilian culture, which values nicknames.

Test bars, which have previously sold no scotch, now sell a case of White Horse a month. Deirdre and I have outlined the big themes that drive our business, but this is an example of one of the hundreds of practical applications of those themes that drive our overall performance.

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Thank you for your time, and I look forward to you joining our live Q&A session at 9:30 this morning.