Diageo Plc

  • Global   alcoholic drinks group Diageo earlier this week reported preliminary results   for the year ended 30 June, with net sales falling by 8.7% to £11.8 billion   as the Coronavirus pandemic took its toll. Organic   net sales were down 8.4%, with growth in North America more than offset by   declines in all other regions. Organic volumes were down 11.2%.

  • Organic   operating profit was down 14.4%, driven by volume declines, cost inflation   and unabsorbed fixed costs that were partially offset by short term cost   reductions and ongoing productivity benefits.

  • Basic   eps of 60.1 pence decreased by 54.0% primarily due to exceptional operating   items. Pre-exceptional items, eps declined by 16.4% to 109.4 pence.

  • Free   cash flow of £1.6 billion was generated, £1.0 billion lower than prior   period, largely due to lower organic operating profit, lower dividends from   associates, one-off tax impacts and increased working capital use.

  • Diageo   announced a final dividend of 42.47p per share, flat on last year and   bringing the full-year dividend up 2% to 69.88p.

  • Due   to the tough environment, a decision was made to boost liquidity with net   debt increasing by close to £2.0 billion to £13.3   billion. This in turn saw the net debt to EBITDA ratio jump to 3.3x from 2.5x   and well above management's target of around 2.0x to 2.5x.

  • North   America was the only bright spot, with sales rising 2%, reflecting strong   demand for tequilas and ready-to-drink beverages at supermarkets and alcohol   stores. All other regions experienced double digit declines. Asia fell the   most, dropping 16% due to the impact of coronavirus-related closures of   alcohol outlets and bars in India and Thailand, while in China demand was hit   by the absence of the Chinese New Year.

  • Although the company owns several high-quality brands and has a long track record of delivering robust returns, the jump in gearing levels is an area of concern. Specifically, it limits the ability of Diageo to make strategic acquisitions and given the current environment, several opportunities may well present themselves. However, due to the company’s stretched balance sheet, Diageo’s competitors such as Pernod Ricard or Brown Forman, are in our view better placed to take advantage of this. Although Diageo is one of our holdings in the global portfolios, given the situation described above, we are currently assessing the position.

Diageo Plc