Diageo
Global alcoholic drinks group Diageo earlier this week reported robust interim results for the six months ended 31 December 2021. It reported net sales of £8.0 billion, representing an increase of 15.8%, with strong organic growth, partially offset by an adverse foreign exchange impact. Organic net sales grew 20%, driven by strong double-digit growth across all regions. Revenue growth was attributable to the continued recovery in the on-trade, resilient consumer demand in the off-trade as well as market share gains. These factors were underpinned by favourable industry trends of spirits taking share of total beverage alcohol and premiumization.
Diageo reported an operating profit of £2.7 billion, an increase of 22.5% on the comparable interim period. Significantly the operating margin increased by 190bps to 34%, primarily due to growth in organic operating profit. Return on invested capital increased by 352bps to 19.3%, driven by organic operating profit growth, partially offset by increased tax. Basic EPS of 84.3 pence increased by 54% and pre-exceptional EPS increased by 22.5% to 85.6 pence.
Looking at the regional breakdown, North America reported net sales grew 10%, primarily reflecting strong organic growth. US spirits growth was primarily driven by tequila, up 61%, as well as rapid growth in Canadian whisky, scotch, and vodka, which more than offset declines in rum, US whiskey and Baileys. North America now accounts for 37% of Diageo’s revenues. In Europe, net sales increased by 21%, primarily driven by strong organic growth. Growth was underpinned by the spirits category gaining share of total beverage alcohol and premiumisation. Beer net sales grew 44%, driven by a strong increase in Guinness as on-trade restrictions eased in Ireland and Great Britain. Europe contributed 22% of Group revenues during the period. The Asia Pacific region reported net sales growth of 10%, primarily reflecting strong organic growth. Greater China net sales grew 18%, primarily driven by strong momentum in both Chinese white spirits and super-premium plus scotch. In India, net sales grew by 12%, reflecting strong consumer demand in the off-trade channel, recovery of the on-trade channel and strong premiumisation. The Asia region accounted for 19% of revenues. Africa reported net sales growth of 17%. Growth in Africa reflected a good performance across all markets except Ethiopia, which continued to decline. Growth in South Africa was impacted by continued on-trade and off-trade restrictions related to Covid-19, as well as economic and social challenges. Africa contributed 11% to Diageo’s interim revenues.
Diageo with brands such as Johnnie Walker, Baileys, Guinness and Don Julio is undoubtedly a high-quality company. In our view these brands provide a substantial moat which should allow the company to continue generating shareholder value as it has done in the past. We remain long term shareholders in the Cratos BCI Worldwide Flexible Fund as well as global portfolios despite the relatively elevated PE multiple of around 25x.
