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BNPP Exane View We noted that Diageo is extremely confident on the delivery of its Accelerate cost savings (which have been pulled forward to 40% of the total in FY26). Given that consensus profit cuts are likely to be fairly limited, the c.-6% share price reaction feels quite harsh. However, Diageo is a top-line stock and with US spirits value depletions declining c.-7% in Q1, the US market context at the super-premium end of tequila becoming more challenging and Don Julio still facing high comps in the US in FY26, we did not come away with the sense that organic sales visibility is much higher than when the FY26 guidance was issued in August. All said, we would be surprised to see stock drift any further than the current -6% move today. Highlights: QandA . US: a lot of moving parts in the US, there was some tariff pre-buy and stock ahead of OND. In North America had net sales and bit ahead of depletions which is typical this time of year. Depletions growth in Q1 was c.-7% (c.-2.5% below sell-in). Seeing weakening depletions overall in part driven by Tequila. Depletions vs. sell-in is not managed on quarterly basis look to align for H1 and FY. Don''t expect significant impact on reversal in Q2 as some of the pull-forward unwound within Q1 and lot depends on strength of the holiday season. Not guiding to depletion growth for Q2. . Commercial execution: where Diageo has feet on the street, Diageo sees stronger performance than some of the control accounts. . US Tequila: knew that going into this year there was going to be an issue with the comps given the strength of Don Julio last year. Seeing competitive pressure and potentially some switching out of tequila and into RTD and use of tequila as a chaser. The share moderation of DJ in Q1 was about 75% driven by comps (May-2025 was when small sizes were launched and the peak was in September) and there was the big ramp up in share of Reposado. The category itself was growing c.10% in 2023; c.6% in 2024...
Diageo plc
BNPP Exane View While Q1 LFL sales (flat vs. co. cons. -1.3%) is a modest beat, Diageo has cut its FY26 guidance at both the top- and bottom-line driven by the adverse impact from Chinese white spirits and a weaker US consumer environment than originally planned for (including increased competitive pressure in US spirits, particularly in tequila). While there had been some expectation of a trim to the FY26 LFL sales guide, we think guidance for flat to slightly negative LFL sales is a bit worse than expected. While we expect a negative share price reaction, given valuation and the weakness of the shares YTD we expect it to be fairly modest today (c.-1-2%). Q126 headline metrics . LFL sales: 0.0% (co. cons: -1.3%; BBG cons. -1.2%) . LFL vol: +2.9% (co. cons. -0.9%) Top-line drivers Scanning the Q126 top-line drivers by region we note that all regions contributed to the Q126 LFL sales beat (0.0% vs. co. cons. -1.3%) apart from Asia Pacific which came in narrowly below consensus expectations (-7.5% vs. co. cons. -6.7%). By region, the beat was led by Latin America and Caribbean (+10.9% vs. co. cons. +5.9%) and Europe (+3.5% vs. co. cons. +0.5%) in particular, while the North America (-2.7% vs. co. cons. -3.5%) and Africa (+8.9% vs. co. cons. +8.1%) regions also came in modestly ahead of consensus expectations. Overall group volumes grew by +2.9% (vs. co. cons. -0.9%), led by strong volume growth in Africa (+10.7%), LAC (+6.7%) and Asia Pacific (+5.2%), while North America (-2.1%) and Europe (-1.9%) were in decline. The stronger group volume growth was partially offset by negative price/mix (-2.8%), driven by Asia Pacific (price/mix -12.8%). Bottom-line drivers N/A - only a sales update. Other metrics . US spirits: While Diageo had planned for a cautious US consumer environment, the overall spirits market was softer than expected, with increased competitive pressure, particularly in tequila. US spirits Q126 LFL sales declined -4.1% (no comment is...
Limited changes to consensus EPS likely but different shape DGE has reported Q1’26 sales of $4,875m, +0% organic, a 1% beat vs. Consensus $4,830m, -1.3% organic. This was delivered by strong performances in Europe (+3.5% OSG), LatAm (+10.9%) and Africa (+8.9%), offset by expected weakness in North America (-2.7%) and worse than expected APAC (-7.5% with double-digit declines in China). With softer trading in the US and China Baijiu expected to continue, FY organic sales guidance is being downgraded from c.+1-2% to flat to “slightly” down while organic EBIT is now expected to grow low-to-mid single digits vs. mid-single digit previously. Encouragingly the FCF FY guidance of c.$3bn is reiterated, as are the mid-term leverage and cost saving ambitions ($625m over 3 years). Given recent data and peer reporting, the market had anticipated a softening of the sales and EBIT guidance (consensus +0.8% sales, +3.3% EBIT) and given the reiteration of the cost and cash ambitions, we wouldn’t anticipate material changes to consensus today, albeit shares may be weaker on the open. Organic outlook tweaked down Organic sales are now expected flat to “slightly” down yoy with organic EBIT now expected to grow low-to-mid single digits. Other guidance items are broadly unchanged at c.25% effective tax rate and 4.0% effective interest rate with capex at the low-end of a $1.2-1.3bn range. For FY26, company-compiled consensus is anticipating $20,206m sales, +0.8% organic, $5,828m adj EBIT, +3.3% organic and $1.68 adj EPS. We currently model $20,474m sales, +1.3% organic, $5,854m adj EBIT, +3.0% organic and $1.70 adj EPS, +4% yoy. Our view DGE shares are -30% ytd – this leaves it trading on just 13.3x cal.26 P/E (a 5% discount to European Beverages on 14.1x), 10.5x EV/EBITDA and 4.5% dividend yield. While the headline guidance downgrade today may disappoint, it was broadly expected in the circumstances with new DGE management looking to focus on the controllables. As the wider market backdrop for Spirits remains subdued, particularly in the US, DGE is focussed on self-help, and especially on delivery of sustainable improvements in both margins and cash generation.
What happened? USL, Diageo''s majority owned India subsidiary, has issued a preliminary fiscal Q226 (Sept-Q) sales update ahead of the release of Diageo group sales on Thursday 6th November. BNPP Exane View: USL (Diageo India) cal. Q3 LFL sales grew +11.5% in the Sept-25 quarter. We note that growth in the quarter was led by strong growth from the Prestige and Above portfolio (+12.4%), while the Popular brands also saw solid growth in the quarter (+9.2%). USL notes that the strong +11.5% sales growth in the quarter was driven by the re-entry of Andhra Pradesh, strong performance of innovation offerings and easy comps (cal. Q324 group LFL sales -0.8%), but comments that this was largely offset by adverse policy changes in the state of Maharashtra. Overall, we view the update from USL as a modest positive from a Diageo perspective. Diageo is scheduled to report its fiscal Q126 sales update next week on 6 November. Summary of key figures (by USL fiscal quarter) / Q226 profits: gross margin: +190bp; underlying EBITDA margin: +337bp. Note: marketing as % of sales 7.6% Context We estimate that USL (Diageo India) accounted for c.7% of Diageo''s FY25 sales.
We have adjusted our estimates to reflect modest operational revision to phasing of our Q126 / Q226 organic sales growth. We do not consider the changes to be material; our rating and target price are unchanged.
Diageo Q1 FY26 preview: Softer start to FY26 but margin/cash driver fundamentals still intact
Greater reliance on self-help in subdued Spirits environment We update our Diageo model ahead of its Q1 FY26 trading update on 6 November. Given still generally tough end-market conditions for Spirits (e.g. -7.6% organic sales delivered by key peer Pernod Ricard in the period), we expect a subdued start to FY26 for DGE with -1.5% organic sales to $4,841m (-2.9% reported). At this point we don’t expect a material change to FY26 guidance (organic sales growth “similar” to the +1.7% in FY25, mid-single digit organic EBIT growth – both H2-weighted, c.$3bn FCF). However, given the soft external momentum into the key Festive trading period, we prudently tweak down our estimates by c.1%. We now model +1.3% organic sales, +3.0% organic EBIT, margin +50bp and $1.70 adj EPS vs. +1.8%/+4.0%/+60bp/$1.72 previously. Q1 FY26 expectations The organic comps are volatile by region (see tables on p.3) but we expect no major changes vs. Q4/H2 FY25. For Q1, we model North America -3% (soft underlying Spirits market offset by tariff-related restocking of UK/EU products and good Guinness), Europe +0.5% (Guinness strength offset by weak Spirits), APAC -6% (dragged down by China Baijiu), Africa +4% and Latin America +4%. Our view Shares are -30% ytd and are -16% from mid-August highs as it has become clear that broader consumer demand remains subdued. DGE is not immune from these pressures, especially in the US, but we believe the extent of self-help potential, particularly around cost/margins and cash generation/deleverage is under appreciated, while its portfolio diversity should allow it to outperform pure-play Spirits peers. Valuation on 13.8x cal.26 P/E and 11.2x EV/EBITDA for a >4% dividend yield is unchallenging relative to history and peers. BUY.
What happened? We recently caught up with Diageo to get a summary of what it has been saying to investors over recent weeks (Diageo reports Q126 sales on the 6th November). Overall, we felt the tone from the company was neutral with some caution on Apac (China baijiu) but more reassuring comments on North America. We think consensus Q1 LFL sales is likely to remain broadly unchanged at c.-1% (cf. BBG cons. -0.6% at present). There was no change to Diageo FY26 guidance. Points of colour: . US: the phasing related benefit in Q3 had mostly reversed in Q4 and there was further tariff related uncertainty related to tariffs on the UK / EU in August which may drive some forward buying in Q125. Don Julio will lap strong sell-in in Q1 (the bottle size range was extended in the PY) and while Nielsen trends have sequentially softened slightly, Guinness is seeing strong momentum. . Apac: In China, Diageo noted that the impact of tightened regulation increased following FY25 results and is having an impact on the baijiu category. In India, Maharashtra is around 16% of sales per USL. . Europe, LAC, Africa: In each of Europe, LAC and Africa we did not get the sense that momentum has materially changed sequentially. However in Brazil, while it will not impact Q1, Diageo noted the recent news about counterfeit beverages which is having an impact on recent consumer spirits demand.
Entain Solid Q3 update; FY guidance maintained Rank Group Strong Q1; FY expectations unchanged Diageo Read-across from LVMH Q3'25 trading update Wickes Group Positive D&I Visit – Self Help and Leverage to an Upturn
DGE RNK ENT WIX
We have adjusted our estimates to reflect modestly lowered FY26e organic sales and EBIT growth forecasts (FY26e LFL sales growth now -0.4% from +0.2% previously). We lower our EPS estimates by c.-1% (reduced organic estimates partially offset by updated FX). We do not consider the changes to be material; our rating and target price are unchanged.
FY25 results served to reassure the market FY25 results appear to have reassured the market (the shares are up 12% since). With this report we argue that there were several individually small factors, that when combined, flattered the results on headline metrics. FY25 results, in our view, were not as reassuring as some have concluded. FY25 PBT was a -3.3% miss on an apples to apples basis vs. a +1.2% headline beat Fair value remeasurements, driven by the unwind of contingent consideration on historical acquisitions (that did not meet earn-out targets) contributed c.USD139m to FY25 EBIT (bei). This compares to expectation of a -USD42m YOY headwind per co. consensus. Diageo also began capitalising borrowing costs in respect of its capex in FY25 which contributed USD46m to underlying finance income (bei) (also not expected by consensus). Combined, we estimate FY25 PBT was arguably a -3.3% miss rather than the +1.2% headline beat. The Ciroc North America disposal added an est. c.+80bp to US spirits FY25 LFL While it only had a c.20bp impact on group LFL, we estimate Diageo''s organic growth for the key US spirits division would have been c.+0.8% including Ciroc rather than the +1.6% reported. We continue to be below consensus at both the top and bottom line Many continue to argue that Diageo is very cheap. We disagree and view c.17x P/E (CY26e) as expensive for what is likely to be only very modest organic sales growth in FY26 (BBG cons. +1.4%; BNPPEe flat). We see little further scope for the shares to re-rate while spirits industry and Diageo''s own sell-out trends remain in material decline (in both the US and Western Europe) and expect consensus earnings to be subject to downward pressure. Our FY26e EBIT is -6% below BBG cons., around half of which is driven by non-organic impacts. We reiterate our Underperform rating and GBp1,700 target price.
Summary of FY25 results Diageo FY25 LFL sales grew +1.7% (+1.5% excluding a +20bp benefit from removal of Ciroc North America from headline organic growth), which was broadly in-line with co. cons. (+1.4%). FY25 LFL EBIT declined -0.7% (-1.0% inc. Ciroc North America) modestly ahead of expectation (co. cons -1.2%) driven by North America (LFL EBIT +0.3% vs. co. cons. -2.3%). FY USD EBIT was a c.+1% beat but a c.-2.5% miss excluding the benefit from fair value remeasurements. FY EPS (basic, bei) was a +1.6% beat and FY DPS at USc103.5 was flat YOY. Shares were up ~5% at the close. News We highlight that Diageo expects its group LFL sales growth to accelerate in fiscal H226 following a slight decline in H1. Earnings We revise our FY26e/ FY27e/ FY28e EPS by +2%/ +3%/ +3%, primarily driven by reduction to our net finance cost forecasts which in turn is partly attributable to capitalisation of borrowing costs on capex spend. Investment thesis We see risk that further moderation of Diageo''s US growth leads to earnings downgrades and a de-rating. Rating and target price We maintain our Underperform rating. Our TP moves from GBp1,660 to GBp1,700. 15 questions for management Does your FY26 top-line guidance embed an assumption of improvement in your prevailing US spirits value sell-out (Nielsen / NABCA) decline of c.-4% (fiscal H225)?
BNPP Exane View There was some directional colour on why group FY26 LFL growth should accelerate in H2, but beyond this incremental news from the QandA was limited in our view. While we view +7% share price reaction today as quite generous we are not surprised given the negative sentiment around the stock. Highlights: QandA . US depletion outlook: Diageo''s focus in FY25 was to get inventory levels to more normalised levels, in Q3 there was a pre-tariff buy-in which Diageo believe has largely reversed (will see in Q1). Planning for a more cautious consumer environment in the US but with a focus on where the business can outperform. . Europe outlook: plan on being much more locally focussed and occasion led. In France, for example, are looking to unlock growth opportunities across spirits now that Diageo has control of RtM. . FY26 outlook moving parts: confidence on H2 acceleration comes from building of capability in areas are 3 main buckets: 1) driving sharper commercial execution at point of sale; 2) 6 priority markets for RTDs will ramp-up in H2; 3) the broader work on the portfolio where there is more to do on mainstream core / premium core and there is more to do on price laddering at the premium end. Final piece is that execution of the strategy on malts. . Scope: USD50m impact on EBIT from disposal completed and deals not yet completed (Ghana and Seychelles) will have another USD50m impact on EBIT and USD300m on sales. . H1 guide: planning for a more cautious environment through most of the year but more H1 weighted due to lapping of Don Julio stocking. Can see that the consumer wallet is still stretched if you look at recent Nielsen/NABCA data. However, see the RtM changes are really driving improvements on being the customer choice. . China: the market has been more challenged but the team is doing a lot to look at different parts of the portfolio so relevance is high and in the right packs. Hope that baijiu trends improve in H2 on...
+2% EPS beat for FY25, at least low-single digit FY26 upgrades For FY25, DGE has delivered +1.7% organic sales to $20,245bn (cons: +1.4%), organic EBIT was -0.7% to $5,704m (cons: $5,693m, -1.2% organic), with margin -68bp yoy, and -8.6% adj EPS to $1.642 (+2% vs. cons: $1.61). While there are some phasing benefits which could unwind in H1 (US Spirits shipments 1.6ppt > depletions), for FY26, DGE is guiding to a robust mid-single digit organic EBIT growth (GBYe +2.6%, consensus +3.0%) underpinned by operational leverage and cost efficiencies. This should drive at least low-single digit consensus upgrades. Strong FY26 Outlook FY26 organic sales growth is expected to be “similar” to FY25 (e.g. +1.7%) with mid-single digit organic EBIT growth, including current expected tariff impacts – both are likely to be H2-weighted with organic sales down “slightly” in H1. Tax rate to be c.25% (FY25: 24.9%), effective interest rate at c.4.0% (FY25: 4.1%). Capex is anticipated at $1.2-1.3bn (FY25: $1.5bn) driving FCF of c.$3bn (FY25: $2.7bn), including Accelerate implementation costs. For FY26, consensus is looking for +1.8% organic sales to $20.65bn, +2.6% organic EBIT to $5,854m and $1.693 adj EPS – we model +2.3% organic sales to $20.9bn, +3.0% organic EBIT to $5,924m and $1.70 adj EPS (+4% yoy). Our view With shares -28% ytd, DGE now trades on 14.5x cal.25 P/E (below European Beverages on 15.8x) and 11.3x EV/EBITDA, supported by a dividend yield >4%. While there might be some pushback on the H2-weighted nature of the guidance, given recent underperformance, the confidence on margin and cash delivery should be taken well by the market. Given recent management changes, there is a clear signal of urgency in changes being driven by new interim CEO Nik Jhangiani, not least taking c.$1.4bn in exceptional charges and asset write-downs.
BNPP Exane View FY25 results are modestly ahead of consensus at both the top and bottom line. We do note however that headline adj. EBIT includes a c.USD150m benefit from fair value remeasurements (co. cons. -USD42m), excluding this we estimate FY EBIT was a c.-2.5% miss. This means FY26 consensus will potentially remain largely unchanged despite guidance of +MSD FY26 LFL growth being ahead of co. cons. (+2.6%). More importantly, while the outlook points to an H2 weighted delivery, we suspect guidance for FY26 LFL sales growth similar to FY25 is better than feared. Given the YTD weakness / negative sentiment around the stock we call the shares +3-5% this morning. FY headline metrics . LFL sales: +1.7% (co. cons: +1.4%; BBG cons. +1.4%) . LFL EBIT: -0.7% (co. cons: -1.2%; BBG cons. -1.3%) . EBIT: USD5,704m (+0.9% vs. co. cons.). Note: we estimate EBIT ex. USD152m of fair value remeasurement benefits was a c.-2.5% miss vs. consensus. . EBIT margin YOY: -1.2% (co. cons: -1.3%) . EPS (basic, bei): USc164.2 (+1.6% vs. co. cons.) . DPS: USc103.5 (co. cons. USc104.0) Top-line drivers Scanning the FY25 top-line drivers by region we note that the modest FY25 LFL net sales beat (+1.7% vs. co. cons. +1.4%) was led by Africa (+10.5% vs. co. cons. +8.6%), North America (+1.5% vs. co. cons. 0.0%), LAC (+9.2% vs. co. cons. +8.3%), offset by softer-than-expected performance in Asia Pacific (-3.2% vs. co. cons. -1.1%), while Europe was broadly in-line with consensus estimates (+0.3% vs. co. cons. +0.2%). Bottom-line drivers The -120bp reported EBIT margin change reflects a -68bp organic change (H1 -69bp), which in-turn reflects GM: +9bp (H1 +19bp), Marketing: +30bp (H1 +52bp) and Overheads and Other Items -107bp (H1 -140bp). By region we note that the modest organic EBIT beat was primarily driven by North America (+0.3% vs. co. cons. -2.3%), more than offsetting Asia Pacific (-11.0% vs. co. cons. -4.6%) and Europe (-2.5% vs. co. cons -1.0%), while Africa and...
What happened? USL, Diageo''s majority owned India subsidiary, has issued a preliminary fiscal Q126 (June-Q) sales update ahead of the release of Diageo group results tomorrow morning. BNPP Exane View: USL (Diageo India) cal. Q2 LFL sales grew +8.4% in the June-25 quarter. This implies growth of c.+10% in Diageo''s fiscal H225 (ending June) which compares with our own Diageo India H225 LFL sales growth est. of +9.2%. We note that growth in the quarter was led by the lower end Popular brand (+13.6% sales growth). USL comments on the quarter lapping a high comp base that involved proactive actions to mitigate potential supply chain disruption in view of the Union Elections. While the demand environment remains muted, USL has been able to sustain its growth momentum. There is no profit colour provided in the preliminary update. Overall, we view the update from USL as neutral from a Diageo perspective. Summary of key figures (by USL fiscal quarter) / Profitability: No profit colour provided with the preliminary update. Context We estimate that USL (Diageo India) accounted for c.6% of Diageo''s FY24 sales.
We believe consensus depreciation estimates are materially too low From FY14-21 Diageo''s capex/DandA ratio averaged 1.42. From FY22-24 this ratio has jumped to 2.26 as the company embarked on many expansion projects. Much of this capex has not yet begun depreciating (sitting in assets under construction). As it does, we expect depreciation to catch-up. Our FY26/27e DandA estimates are 17%/23% above co. cons. FY26e North America consensus estimates are still materially too high Consensus looks for a FY26e LFL sales decline in North America (NAM) of -0.4% (BNPPEe -2.7%) and LFL EBIT growth of +0.2% (BNPPEe -3.2%). We view this as very optimistic given Diageo''s prevailing US spirits sell-out trend (-4.3% sales per Nielsen; -4.0% vols per NABCA in cal. Q2). We expect further pressure on consensus top and bottom-line estimates Taking the above factors together, we look for FY26e group LFL sales growth in very modest positive territory at +0.3% (co. cons. +1.8%) and our FY26e EPS sits -7.5% below. We see no incentive for the company to raise expectations ahead of CEO appointment We see no incentive for Diageo to raise expectations ahead of the appointment of a permanent CEO. It is not impossible that Diageo guides for a FY26 LFL sales decline with this in mind. We reiterate our Underperform rating. TP to GBp1,660 (roll forward of earnings base) We are cognisant that sentiment on the stock is negative (see here) and positioning has been a big factor in recent Staples post earnings share price reactions. However, while consensus estimates are subject to downgrades we do not foresee a sustained turnaround for the stock. We reiterate our Underperform rating and would reduce exposure if there is a rebound based on positioning unwind at results next week (5th August).
We have adjusted our estimates to reflect updated FX, the recently announced small disposal of the Italy plant to NewPrinces SpA and modest revisions to our operational estimates. We revise our target price from GBp1,720 to GBp1,635. We do not consider the changes to be material; our rating is unchanged.
Modest changes to forecasts for FY25/FY26 We update our DGE model ahead of its FY25 results on 5 August, mainly to update for FX. We keep our EPS estimates largely unchanged, modelling $1.63 for FY25, -9% yoy (+1.3% organic sales, -1.2% organic EBIT) and $1.70 for FY26, +4% yoy (+2.3%/+3.0%, margin +20bp). Now trading on just 15x cal.26 P/E and 12x EV/EBITDA, DGE screens as good value vs. its historical 18x P/E. Acknowledging the soft current external data (e.g. Nielsen), the market will likely want to see signs of delivery before fully giving credit to the self-help re-rating story. Divisional drivers – forecasts p.3 For H2 FY25, we model +1.7% organic sales growth (NorAm +0.5%, Europe -0.9%, APAC +1.0%), implying Q4 -1.8% (NorAm -4.6%, Europe -1.2%, APAC +0.4%). Q3 +5.9% organic sales was helped by a c.4ppt tailwind from phasing, mainly in Americas (NorAm +6.2%, Europe -0.4%, APAC +1.6%). Given some investments in Europe and NorAm, guidance is for a slight decline in organic EBIT in H2, similar to the -1.2% in H1 – we model -1.1% with margins -70bp yoy. FY results to provide clarity on direction of travel, not firm catalyst We recently upgraded DGE to Buy, arguing that the -25% sell-off ytd is over-done with the scope of self-help benefits (both on margins and cash/debt) under appreciated. Given the widespread macro uncertainty (including tariffs), we don’t expect the FY results to be a catalyst per se. We do hope that management provide: i) further colour on the scope and phasing of the $500m Accelerate cost savings plan to be delivered by FY28; ii) the drivers of the minimum $3bn FCF from FY26 onwards (FY25 GBYe $2.2bn); and iii) a reiteration of the confidence in driving de-leverage to the bottom end of the target 2.5-3.0x leverage range by the end of FY28 (FY25 guidance 3.3-3.5x; GBYe 3.3x).
What happened? We recently caught up with Diageo to get an update on what the company has been saying to investors over recent weeks (Diageo reports FY25 results on 5th August). Diageo''s outlook remains unchanged. BNPP Exane View: Overall, while the key messages from the company remain unchanged, we felt the tone of the company was slightly cautious with respect to organic sales growth in FY26 and we would not be surprised to see consensus shift down toward +1.5% (cf. +2.6% per co. cons and +3.2% per BBG cons). Points of colour below: FY26 LFL sales: Diageo reminded that at the Q3 update it did not repeat its previous comment (with H1 results) of expectation (without tariffs) of a sequential improvement in organic sales growth in FY26 vs. FY25. North America: There were no new messages on the US with market trends broadly unchanged but Crown Royal doing slightly better in the scanner data. Diageo re-iterated its expectation that the majority of favourable phasing benefits in Q3 will reverse in fiscal Q4. FX: Diageo has not provided guidance on likely FX transaction impacts in FY26. While MXN cost exposure is likely to be a tailwind there are also other currencies to consider and more colour will be provided at the FY25 results update.
Buy - £24.50 price target, 34% upside We upgrade Diageo to Buy. While the wider Spirits market backdrop remains uncertain, we see significant self-help potential at DGE to drive a margin and EPS inflection from FY26, even if demand in aggregate is subdued. We see “this time as different” due to the renewed urgency across the organisation driven by new CFO Nik Jhangiani’s Accelerate efficiency plan ($500m gross savings by FY28). As benefits start to drop through, we see 20bp p.a. margin expansion potential (base case for FY26 and FY27), should organic sales growth persist at low-single digits, picking up to >40bp should growth normalise back >4%. Change of tone from the top focuses minds on internally-driven gains In our view, the tone from the company has changed from “hope for the best” to “prepare for the worst” with meaningful changes being made to cost allocation and in particular cash/capital deployment. While there is a risk that our upgrade is premature given continued volatile end-markets and sluggish Spirits demand (+3% organic sales CAGR), we are confident that shares can re-rate over the next 12-18 months as evidence of the margin delivery and FCF inflection come through. Valuation near absolute and relative lows Shares are -28% ytd and are down over 50% from mid-2022 highs (vs. EPS down c.20% over the period). DGE now trades on 14.3x cal.26 P/E and 11.5x EV/EBITDA, supported by a 4% dividend yield and an inflecting FCF yield (>$3bn p.a.). FY25 net debt should be 3.3-3.5x EBITDA, ahead of the target 2.5-3.0x range. However, we expect this to fall back towards 2.5x over time as DGE delivers its FCF inflection strategy (with likely capex and working capital cuts), accelerated by likely “significant” incremental disposals and providing optionality for buybacks.
What happened? Bloomberg has reported that Diageo is exploring selling part or all of its stake in the Indian Premier League (IPL) cricket franchise Royal Challengers Bengaluru (RCB) for a valuation of up to USD2bn. BNPP Exane View: Diageo owns 100% of the RCB cricket franchise via its wholly owned subsidiary, Royal Challengers Sports Private Limited (RCSPL). In Diageo India''s FY24 (ended March-24) RSCPL generated sales of INR6,350m (+160% YOY) and a reported profit of INR2,220m. Diageo India recently stated that RCB is the most popular IPL cricket franchise (based on online viewership stats), and the team recently won this year''s edition of the competition. Diageo leverages the Royal Challenge brand through both alcoholic (e.g. Royal Challenge whisky / Royal Challenge American Pride whisky) and non-alcoholic products (e.g. Royal Challenge packaged water). It is not clear if these brands are being considered for sale or just the sports franchise on its own. India''s Health Ministry has recently pushed for a ban on all forms of alcohol and tobacco advertising, including surrogate promotions, during IPL broadcasts and related events. We note that the reported price tag of USD2bn implies a valuation of 25x sales (12m to Mar-2024) but the cricket franchise revenues are growing strongly. We view the sale as a sensible move as: 1) the asset is non-core; 2) if disposal proceeds of USD2bn are achieved we estimate it would reduce Diageo''s group ND/EBITDA by c.0.2-0.3x; 3) the sale is unlikely to have a material impact from a group earnings perspective. Overall, we expect the shares to react positively to the news this morning (c.+1%).
Speaker: Nik Jhangiani, CFO What we learned: . US market: The company noted that while there have been no big changes in US spirits market trends since the Q325 update, the most recent US spirits data had seen some improvement in-line with US consumer confidence also looking a little better. Diageo commented that it was cautiously optimistic about the US business. . FY26 FCF: Diageo continues to be very confident on the levers it has within its control to deliver c.USD3bn of FCF in FY26 in any scenario. While the company would not be drawn into whether this includes scenarios where LFL EBIT growth is flat to modestly negative, it described the USD3bn figure as a non-negotiable. . Cyclical vs. Structural: Diageo reiterated its belief that the current weakness in US alcohol/spirits demand is primarily cyclical (driven by macro) but commented on needing to be aware of the trend towards moderation which has been a long-term trend. Overall tone: Neutral
Model update – modest EPS changes as FX offsets weaker organic We update our DGE model following its recent Q3 trading update and Guinness deep-dive event. We keep our earnings estimates broadly unchanged as organic downgrades for FY26 (from +3.4%/+4.2% organic sales/EBIT to +2.7%/+3.5%) are largely offset by FX tailwinds. Following +5.9% organic sales growth in Q3 (+2% ex-tariff phasing), we model -0.6% decline in Q4 – this drives FY25 organic sales +1.6% and organic EBIT -0.9% to $5,701m with adj EPS -8.5% to $1.64. Welcome focus on costs, cash and internal controllables While performance in ~1/4 of the portfolio is robust (Tequila at c.15% sales, Guinness at c.10%), the rest of the portfolio is modest at best, impacted by myriad factors across DGE’s key geographies (e.g. affordability, abstinence, tariffs). We see some signs of green shoots for DGE based on an improving launch pipeline and resilient market shares, but for the time being, we expect subdued markets to persist into FY26. With this in mind, we welcome management’s greater emphasis on costs (c.$500m 3-year gross savings under the Accelerate program) and cash (>$3bn FCF per annum commitment from FY26). Details on delivery and phasing will come with FY25 results on 5 August. Patience required to see benefits come through For now, we stay HOLD as it will likely take some time for the cost actions to come through and external visibility remains very limited (e.g. US tariffs). Management’s deleverage priority from 3.3-3.5x EBITDA in FY25 towards c.2.5x by FY28 likely includes “significant” disposals (we estimate up to c.$1bn over the period). Shares are -22% ytd with valuation on 16.1x cal.25 P/E trading just back in line with the wider Beverages (17.0x) and Spirits sector averages, also supported by a c.4% dividend and >4% FCF yield.
Executing well behind Guinness, controlling costs and cash elsewhere Diageo hosted an investor event yesterday in Dublin highlighting the broad success and momentum behind the iconic Guinness beer brand and the multiple future avenues for growth, both in existing and new markets, and through its unique (for beer) wholly owned/produced business and its partner/concentrate operating model. While the Guinness brand accounts for just c.10% of group sales and is going from strength to strength, at the group level and despite subdued Spirits end-markets, management reaffirmed the Accelerate $500m 3 year cost saving ambitions and for a minimum of $3bn FCF to be delivered from FY26 onwards, albeit with further details on phasing and drop-through to be provided with FY results on 5 August. Cultural change evident but more details to follow CFO Nik Jhangiani outlined how the culture at DGE is changing from one focused on % margins to one on incremental $ gross profit opportunities. While end-markets remain cyclically subdued, the near-term focus is on managing cash and costs. Non-working A&P was 21% of spend in FY24 and management aim to get this to c.10% in time – this should result in a re-allocation of costs but also an absolute reduction in spend as “inefficiencies” are removed. Digital investments are expanding the scope of potential savings to optimise trade spend in key markets across 70% of spending (e.g. 30% of UK promotions with negative returns). “Significant” disposals would be part of the deleverage ambition to the bottom end of the target 2.5-3.0x range by FY28 (vs. 3.3-3.5x for FY25E) but this doesn’t include either Guinness or DGE’s 34% stake in Moet Hennessy. Concentrated Guinness business for now with big global potential The top 3 markets for Guinness net sales (GB, Ireland, USA) account for 60% of brand value (and the top 10 markets account for c.95% of value). 80% of brand sales value is produced in St. James’ Gate in Dublin (directly shipped to GB, USA, Europe and South America) while 20% is done through a capital-light concentrate model (now mainly in Africa, Australia/New Zealand) through a range of brewing partners including AB InBev (o/w 12% of Partner net sales value), Heineken (24%), Carlsberg (12%) and Castel (16%).
What happened? Yesterday, we attended a Guinness Deep Dive investor event in Dublin (Ireland) hosted by the Diageo management and IR teams. We left with two positive takeaways: 1) following Guinness'' strong growth in recent years, Diageo sees a significant runway for further growth off a larger base across the brand''s key markets (GB, Ireland and US) and has / is investing in capacity expansion that will allow it to fulfil the consumer demand for the brand; 2) Diageo has mapped out many scenarios for FY26 and in any scenario it is committed to delivering c.USD3bn of FCF which it views as a floor. While it certainly appears that there are more good things to come for Guinness, we continue have concerns that the wait for the rest of the business will be longer than the market expects. Below we summarise key points of note from the event. Guinness specific . Guinness intro: Guinness is Diageo''s 3rd largest brand and accounted for c.10.5% of group sales in FY24 (c.66% of Diageo Beer sales). Guinness has grown at c.+15% 3-yr sales CAGR (vs. c.+8% for the beer category) with Guinness 0.0 at least doubling every year since launch. The top 3 markets (GB, Ireland and US) together account for c.60% of Guinness sales. . Guinness RtM: The brand strength of Guinness allows for an efficient and highly profitable route-to-consumer: c.80% of sales are finished goods from Ireland, this includes imports by Diageo (Ireland; GB; US; S. Korea; Taiwan; Japan) and imported by partners (Europe, CCA, SA); 20% are made by 3rd party partners who purchase Foreign Extra Stout (concentrate) and brew and sell under license for markets such as Australia, NZ, SEA, LAC and EABL. Diageo has successfully optimised its route-to-market in Africa to make it asset light and profitable. Volumes in both Nigeria and Cameroon have seen significant positive inflection since switching to partnerships with local operators with broader distribution footprints. . Investment and capacity:...
Summary of the Q325 trading update Diageo Q3 LFL sales grew +5.9% (vols +2.8%; price /mix +3.1%), benefitting from c.+4%-pt impact from favourable phasing which is mostly expected to unwind in Q4. Around 2/3rds of the Q3 phasing tailwind was seen in North America which grew LFL sales +6.2% and benefitted from a pull-forward of imported shipments in anticipation of tariffs and continued tequila restocking given the strength of consumer demand for Don Julio. US spirits Q3 LFL sales grew +7% on value depletion growth of +2%. The remaining 1/3 of the Q3 phasing benefit was recorded in LAC where LFL sales grew +28.5%. News We highlight that Diageo sees opportunity for substantial disposals (beyond regular portfolio trimming) with a view to maximising shareholder value. Earnings Our FY25e-FY27e EPS estimates remain materially unchanged. Investment thesis We see risk that further moderation of Diageo''s US growth leads to earnings downgrades and a de-rating. Rating and target price We maintain our Underperform rating. Our TP moves from GBp1,775 to GBp1,720 (driven by higher forecast net debt in our EV-based target price derivation). 15 questions for management Assuming you hold your dividend flat, what do you see as the underlying (ex. disposals) ability of the business to de-lever in FY26 on free cash flow of c.USD3bn?
BNPP Exane view The main point of note from the call is that Diageo appears to be more open to substantial disposals (above regular portfolio trimming). Beyond this, to our minds there was only limited incremental colour. As to the shares, while we can understand the modest positive reaction today given positioning / weakness YTD, if anything we believe the underlying substance of the update further supports our view that there is downside risk to consensus FY26 organic sales growth expectation. Highlights: QandA . FCF: consensus has some huge ranges on FCF and Diageo delivery has been inconsistent in recent years. In FY26 capex will remain elevated albeit coming down from FY25 level given in-flight plans. Looking forward, reduced capex will be a focus. On working capital there is more opportunity to unlock on both receivables (commercial AandP and trade spend) and on inventories. There will also be work on mature liquid stocks. Lastly on expected cost savings from Accelerate to support cash flow even without a recovery short-term. . Cost savings: will give more colour on phasing and cost to achieve at FY results. 4 main buckets including trade spend; agility to be able leverage scale; supply chain efficiency. . Disposals: seen through reviews some opportunities for substantial changes above portfolio trimming. Focus will be to maximise value for shareholders. The comment on FY28 ND/EBITDA should give comfort as will be well within range and it will be FY28 at the latest. . Outlook: with strong Q3, believe on track to deliver FY25 outlook. On FY26 intentionally did not reference expectation for top-line next year given the level of uncertainty. . Price / mix: there is a lot of promotion out there but talked at H1 about price / pack opportunities and H1 performance was well balanced. . US consumption: Nielsen / NABCA only tracks 40% of the US. In January felt the industry was getting a bit of momentum but Feb/March were very tough across all...
BNPP Exane View The Q3 trading update is a mixed bag. On the positive side: guidance is re-iterated and now includes the expected impact of tariffs; Q3 sales is likely modestly better than most expected; interest guidance is modestly more favourable; Diageo has announced a material 3-year cost savings programme. On the negative side: strong Q3 LFL sales is largely explained by phasing effects and leverage (ND/EBITDA) comments are likely to come as a negative surprise. Overall, with YTD weakness of the shares in mind, we expect a modest positive share price reaction this morning. Q325 headline metrics . LFL sales: +5.9% (BNPPE +4.7%) . LFL vol: +2.8% . Sales: USD4.4bn Note: there is no reliable consensus available. Top-line drivers Scanning the top-line drivers by region, Q3 group LFL sales of +5.9% was led by strong growth in Latin America (+28.5%) and Africa (+10.1%), as well as +6.2% LFL sales growth in North America, which was partially offset by softer trends in Europe (-0.4%) and Asia Pacific (+1.6%). Diageo comments on performance in Q3 being supported by favourable phasing which it estimates contributed c.4% to Q3 group organic sales growth, mainly from North America (c.2/3rds) and to a lesser extent Latin America and Caribbean and is expected to reverse in Q4. Bottom-line drivers N/A - only a sales update. Other metrics . US spirits: LFL sales grew +7% (cf. H1 flat). Q3 value depletions grew +5% (cf. H1 flat). NAM saw a pull-forward of imported shipments in anticipation of tariffs which favourably impacted results and was also supported by continued tequila restocking given strong Don Julio consumer sales performance. . Tariffs: USD150m annualised impact based on 10% US tariff on UK and EU (and exemption under USMCA on Canada and Mexico). Diageo expects that given the actions that it has in place already, it will be able to mitigate around 50% of this impact on EBIT on an on-going basis. Looking ahead, Diageo will continue to work on...
We see upside risk to consensus US spirits LFL growth in H225e...however We believe continued strength in Don Julio sell-in could lead to a positive surprise in H225e North America LFL sales growth (we forecast +2.1% vs. BBG cons. +0.2%). Possible wholesaler stocking could mean US spirits in Q3 (Mar-Q) is particularly strong, we forecast +5%. ...end consumption matters most, and this appears to be deteriorating Ultimately consumer demand is what matters most and we note that Diageo''s sell-out momentum (per both Nielsen and NABCA) is deteriorating. We see 3 areas of growth normalisation risk in FY26. Growth normalisation risk 1: Don Julio US buyers of Don Julio appear to over-index (vs. Tequila) to Hispanic consumers per Numerator data. Growth momentum (which has been incredibly strong at +61% US LFL in H125) looks vulnerable in the current US consumer context and sell-out shows signs of some slowdown in April. Growth normalisation risk 2: Crown Royal Sell-out for Crown Royal has turned negative as the brand laps the Blackberry launch. We see risk that the runway for flavour extensions is running out and the brand turns to a growth drag in FY26. Growth normalisation risk 3: Guinness Normalisation of double-digit volume growth for Guinness in Europe is inevitable in our view and the off-trade sell-out data points to this natural moderation in demand now taking place. We re-iterate our Underperform rating (TP to GBp1,775 (from GBp1,870)) Our North America LFL sales est. is ahead of consensus in FY25e but FY26e is a different matter (BNPPEe -0.4% vs. BBG cons. +2.2%). While the stock has been weak YTD, it still trades at a material premium to Pernod (=). The gap could narrow on US growth concerns, and we remain U/P.
What happened? Diageo presented at the CAGNY (Consumer Analyst Group of New York) conference, we attended virtually and summarise our key takeaways below. BNPP Exane View: Diageo remains confident that the current pressure being faced by the spirits industry in the US is cyclical and reflects pressure on consumer income. When consumer wallets recover, Diageo expects to see stronger growth. The presentation highlighted the strengths of the Diageo portfolio (particularly Tequila) and the re-shaping of its financial priorities under the new CFO, in-line with the same messages given with the recent H125 results. We did though note that Diageo will launch Casamigos into canned RTD Margaritas which appears to mark a shift in its RTD strategy / ambitions with a premium brand being extended into the format. Debra Crew (CEO) . Portfolio: 13 billon dollar brands; #3 in total beverage alcohol and #1 in international spirits . Premium: 62% of FY24 sales were in premium above in FY24 (vs. industry 35%). Super-premium plus price tiers growing at early 1.5x the rate of total spirits. . Cyclical pressure: the debate around alcohol / spirits is not new, heard before in previous cycles in 2004 and 2014. The current pressure being faced by the industry is cyclical and driven by pressure on consumer wallets. . US consumer wallets: macro headline numbers and sentiment are improving in the US but grocery baskets are costing 20% more for 11% less vs 2020 in 2024 due to inflation. This is putting pressure on discretionary spend by consumer spend on alcohol as % of total has held up which is reassuring. Diageo is confident that as wallets recover, it will see stronger growth across its portfolio. . US TBA: Nov-24 vs. Nov-22 US TBA and core spirits volumes are -5.7% and -4.6% below but US spirits has taken +40bp of TBA share over this period. Household penetration of core spirits has increased in 12m to Nov-24 vs. 12m to Nov-22 (all other alc. sub-categories declined). ....
Summary of H125 results H125 organic sales growth (+1.0% vs. co. cons. +0.4%) and EBIT growth (-1.2% vs. co. cons. -2.2%) were both modestly ahead of expectation primarily driven by the LAC region. US Spirits LFL sales growth was flat in H1 (with depletion growth ahead of this but within 1%-pt) driven by Don Julio (+61%), Crown Royal (+3%) and Ketel One (+2%) offset by declines at all other major brands. H1 adj. EBIT was a +1.8% beat but H1 EPS (basic, bei) was a -1.4% miss (driven by associates). H1 DPS at USc40.5 was flat YOY. Diageo dropped its +5-7% medium-term organic sales growth outlook. News We highlight that, if US tariffs on Mexico and Canada are confirmed, Diageo expects a c.USD200m gross EBIT impact on FY25 for the 4-months from 1st March. Around c.40% of this could be mitigated through cost measures before considering pricing actions. Earnings We revise our FY25e/FY26e/FY27e EPS by c.-5% / c.-3% / c.-3%. Investment thesis We believe Diageo is expensive for the mid-term earnings growth it offers and that there is a significant risk of a dividend rebasing. Rating and target price We maintain our Underperform rating. Our TP moves from GBp2,280 to GBp2,090 (reflecting both our EPS revisions and reduction to our target multiple). 15 questions for management What was the H125 LFL sales and value depletion growth of your US spirits business ex. Don Julio?
BNPP Exane view The main incremental point of note from the conference call was quantification of the gross (pre-mitigation) potential impact of US tariffs on Canada and Mexico of c.USD200m on Diageo EBIT in the 4 months of FY25 (from 1 Mar). Diageo''s scenario planning suggests they could mitigate c.40% prior to pricing. We estimate this points to a potential annualised impact of c.6% of group EBIT (post cost mitigation, but prior to pricing offsets). While the comments on the tariff appeared to drive some enthusiasm for the shares, we view the rally as a touch generous (shares are now down c.-1%) given that consensus earnings are likely to be subject to c.3% downgrades before any tariff impact and potentially closer to high-single digits in FY26 if tariffs are confirmed. Highlights: QandA . H2 LFL sales: pleased to be back into LFL growth in H1 and in 4/5 regions. The outlook in Apac is expected to be tougher from a macro perspective but everywhere have seen strong momentum, particularly for Guinness. Africa is seeing really good growth, and the asset light strategy is paying off with sales in Nigeria strong straight away after the improved distribution. North America is expected to continue to show improvement and Crown Royal Blackberry only came in halfway through H2 last year and now expect to make Blackberry permanent. . H2 LFL EBIT: investments in the US (such as the one announced in Alabama) will not start to come through until FY26. Also lapping incentives in H2 (as per H1), if you excluded this (which is a one-off) would have been slightly ahead. Latam has an easier comp in H2 and some retailer destocking in North America in H2. . US spirits: between depletions and sell-out running at within a point of each other. Depletions are running pretty close to NABCA/ Nielsen on a brand-by-brand level. Retailers remains a little cautious but would not describe this as de-stock and Diageo remains very comfortable with its trade inventory levels. ....
BNPP Exane View H125 LFL sales and EBIT is modestly ahead of co. consensus expectation primarily driven by LAC. North America H1 LFL sales grew +0.2% which while ahead of co. cons. (-1.2%) is likely slightly below buyside expectation. Diageo''s outlook points to an organic EBIT decline in H2 (H2 co. cons +3.6%) and medium-term guidance has been dropped, both of which we view as modest negative surprises. As to the shares, while we would typically have expected a c.-3-4% share price reaction (we think consensus EPS estimates will be subject to c.-3% revision) the overnight news that tariffs between the US and Canada are delayed may help to offset today. We call the shares down low-single digit. H1 headline metrics . LFL sales: +1.0% (co. cons: +0.4%; VA cons. +0.3%) . LFL EBIT: -1.2% (co. cons: -2.2%; VA cons. -2.2%) . EBIT: EUR3,372m (+1.8% vs. co. cons.) . EBIT margin YOY: -1.1% (co. cons: -1.0%) . EPS (basic, bei): USc97.7 (-1.4% vs. co. cons.) . DPS: USc40.5 (co. cons. USc40.9) Top-line drivers Scanning the top-line drivers by region, the H125 LFL sales growth (+1.0% vs. co. cons. +0.4%) was driven by stronger than expected growth in LAC (+5.0% vs. co. cons -1.7%), Africa (+8.9% vs. co. cons. +6.3%) and North America (+0.2% vs. co. cons. -1.2%), partially offset by weaker trends in Asia Pacific (-2.6% vs. co. cons. -0.2%) and Europe (+0.7% vs. co. cons. +1.4%). Bottom-line drivers The -132bp reported EBIT margin change reflects a -69bp organic change, which in-turn reflects GM: +19bp, Marketing: +52bp and Overheads and Other Items -140bp. Other metrics . US spirits: LFL sales were flat (value depletion growth was ahead of shipment growth but within 1%-pt with variations across brands) with LFL vols declining -4%. Don Julio net sales grew +62% (+48% depletion growth) as distributors replenished inventories. . US inventories: Overall distributor inventory levels at the end of the H125 remain appropriate for the current consumer environment and...
What happened? USL, Diageo''s majority owned India subsidiary, has reported it fiscal Q325 (Dec-Q) results. BNPP Exane View: We note that the +14.8% LFL sales growth from USL (Diageo India) in the Dec-24 quarter came in ahead of Visible Alpha consensus (+11% from 5 est.). This implies growth of c.+7% in Diageo''s fiscal H125 (ending Dec) which compares to our own Diageo India LFL sales growth est. of +6%. From a profits perspective, we note that EBITDA for the quarter came in c.+3% ahead of VA cons. Overall, we view the update from USL as a modest positive read-across for Diageo. Summary of key figures (by USL fiscal quarter) / Q325 profitability: Gross margin: +131bp; underlying EBITDA margin: +71bp. Note: marketing as % of sales remained at c.11%, unchanged YoY. Context We estimate that USL (Diageo India) accounted for c.6% of Diageo''s FY24 sales.
H1 FY25 results – 4 February We update our Diageo model reflecting FX and recent market updates. While there are some bright spots (e.g. Guinness in UK & Ireland, US Spirits market share), overall Spirits demand in the bulk of DGE’s geographies remains subdued. We cut our FY25 EPS by 3% (-7% yoy to $1.67) and by 6% for FY26 (+4% yoy to $1.74). For FY25, we now model +2.3% organic sales and +0.6% organic EBIT, stepping up to c.4% growth respectively in FY26, albeit with still limited visibility. H1 drivers – full details on page 3 For H1, many of the trends seen in H2 FY24 (-0.7% organic sales, organic EBIT margin -88bp) are likely to have persisted given a still flattish US end-market, persistent China weakness, a soft Q1 in India (albeit temporary) and weak macro in Latin America and Europe (despite Guinness buoyancy). For H1, we model +1.1% organic sales growth, with North America -0.9%, Europe +2.5% and APAC -1.2%. Given investment phasing, we expect organic margin -80bp to 30.3% driving organic EBIT -1.5% to $3,256m and adj EPS -9.6% to $0.98. H1 unlikely to be a major catalyst DGE shares were -11% in 2024 vs. Europe Beverages -16% and now trades on 18.4x cal.25 P/E and 14x EV/EBITDA, a modest premium to peers. While we expect some perspectives from new CFO Nik Jhangiani at the results, it is likely too early, and the external environment too volatile, for DGE to provide a formal mid-term financial outlook to the market. Amongst myriad issues, the potential for import tariffs from the incoming US Administration is likely a persistent over-hang on the name (US accounts for >45% group EBIT with c.25% of US sales from Mexican Tequila, c.20% from Canadian Whisky and c.25% from Europe).
Summary of FY24 results Diageo FY24 LFL sales declined -0.6% (co. cons -0.2%) with volumes declining -3.5%. The LFL sales miss vs. consensus expectation was driven primarily by North America (-2.5% vs. co. cons. -1.5%) where the Diageo''s US spirits business was impacted by retailer de-stocking in H2. The FY LFL EBIT decline at -4.8% was broadly in-line with consensus expectation (co. cons. -4.5%). While absolute USD EBIT was also in-line with co. cons. we note this contains a c.+2% benefit from fair value remeasurements. FY EPS (basic, bei) was a -0.9% miss vs. co. cons. FY DPS was USc103.5. News We highlight that using Nielsen/NABCA data, Diageo estimates US spirits industry sell-out value grew +1.3%, this decelerated to +0.7% over the past 6 months and to -0.2% over the past 3 months. Earnings We revise our FY25e/FY26e/FY27e EPS by c.-7% / c.-8% / c.-8%. Investment thesis Combining weak industry sell-out trends in the US and the relatively geared nature of spirits (de-stock risk), we see risk of further operational disappoints. Rating and target price We maintain our Underperform rating. Our TP moves from GBp2,400 to GBp2,200 (primarily reflecting our EPS revisions) 15 questions for management Medium-term guidance of +5-7% LFL sales growth is above the level Diageo has historically (pre-pandemic) grown at. What is different about the business / industry now that gives you confidence the business has a higher inherent growth rate than in the past?
Diageo''s +5-7% mid-term growth was introduced during peak spirits euphoria In December 2021, the European Spirits sub-sector reached a record valuation of c.29x consensus forward P/E marking the top of the Covid-driven market euphoria on spirits. It was the month after Diageo had introduced its medium-term guidance for +5-7% organic sales growth. We no longer believe the US spirits industry will return to mid-single digit value growth There has been much discussion around when US spirits will return to +4-5% value growth. We no longer believe it will. IWSR, the pre-eminent global spirits data source, forecasts mid-term US spirits industry volume growth of +0.9% from 2024-28 (down from expectation of +2.7% growth in 2021). We cut our Diageo mid-term LFL US spirits growth forecast to +2.5% (from +3.5% previously). History suggests Diageo''s group LFL growth profile is closer to c.+4% Pre-pandemic (FY10-FY19) group LFL growth averaged +3.6% (vols. +1.1%). A period in which alcohol demand saw good growth in the US. We believe US alcohol vol. demand is now ex. growth. The market is now somewhat sceptical, but we see further downside Visible Alpha consensus has already moved down towards the bottom end of Diageo''s mid-term range at +5.2% (FY27e). However, driven by the deterioration in the outlook for US alcohol / spirits, we believe Diageo''s mid-term growth profile is closer to +4.3%. When do we expect Diageo to cut its medium-term top-line outlook? While Diageo only recently (Nov-2023 CMD) re-iterated its medium-term sales growth guidance, with a new CFO and Head of IR incoming later this year, we believe a cut to the outlook (to +4-6%) ahead of their arrival, with upcoming FY24 results (30th July) is possible. While we would view this as a sensible move, cuts to mid-term organic growth are rarely a good starting point for outperformance in Staples. We re-iterate our Underperform rating and reduce our TP to GBp2,400 (from GBp2,500).
We have adjusted our estimates to reflect operational tweaks, updated FX and the proposed sale of Guinness Nigeria. We do not consider the changes to be material; our rating is unchanged.
Summary of H124 results Diageo''s H124 LFL sales declined -0.6%, modestly below consensus expectation (co. cons. 0.0%). The H124 LFL EBIT decline at -5.4% was also a small miss (co. cons. -4.7%). H1 EPS (basic, bei) at USc108.1 was modestly (+1.9%) ahead of co. cons but c.-0.8% below VA. cons. Diageo declared an interim dividend of USc40.5. Diageo now expects its group LFL EBIT growth to be negative in H224 but for the rate of decline to improve vs. H1. News Diageo does not want to predict when the US spirits industry will return to its historical (+mid-single digit) value growth algorithm. It could take 6 months, or it could take 18 months. Earnings We revise our FY24e/FY25e/FY26e EPS by +6%, +2% and +1% (primarily reflecting Diageo''s updated FX commentary). Investment thesis Combining weak industry sell-out trends in the US and the relatively geared nature of spirits (de-stock risk), we see risk of further operational disappoints. Rating and target price We maintain our Underperform rating. Our TP remains unchanged at GBp2,500. 15 questions for management Do you expect organic sales growth in US spirits business to return to positive territory in H224?
Keep Walking...down That there may be downside to consensus estimates should come as little surprise, but we suspect the quantum may. Driven by a combination of our LFL estimates and scope (we assume that fair-value adjustments that boosted Diageo''s EBIT in FY23 do not repeat) our North America FY24e / FY25e EBIT estimates are c.-10% and c.-12% below Visible Alpha consensus. Industry trends are alarmingly weak in Diageo''s largest market The US is Diageo''s largest market accounting for c.50% of profits. US spirits industry volume trends have remained inexplicably lacklustre throughout 2023 and have decelerated in recent months. Diageo''s US spirits vols. declined -3.1% in fiscal H124 per Circana (off-trade sell-out) data and -4.2% in H124 (to Nov-23) per NABCA. We believe consensus expectations for a return to North America volume and EBIT growth in H224e are optimistic and given the volume context incremental pricing in CY24 is likely to be very limited. But is this not priced into the shares? While Spirits have experienced a material relative de-rating, we believe that earnings downgrades of this magnitude are not priced into Diageo''s valuation. The stock now trades at relatively stretched c.2.8x P/E-point premium to Neutral rated Pernod Ricard on our FY25e estimates. We see risk that GLP-1 fears spread to US spirits We suspect noise around GLP-1s will return in 2024 as drug availability increases in the US. Preliminary data from Numerator suggests US shoppers taking GLP-1s reduce their alcohol spend per trip vs. a control group. This may add another layer to the negative sentiment on US spirits. We downgrade Diageo to Underperform We downgrade Diageo to Underperform (from Neutral). TP to GBp2,500 (from GBp3,000).
CMD: Management trims near-term margin expectations on persistent inflation & soft macro Regarding the outlook for the group, management has trimmed medium-term EBIT growth from 6-9% to “broadly in-line with” the (unchanged) 5-7% net sales growth it targets, due to the weaker macro more generally (not just in LatAm), inflation (recent oil price move) and the need to invest more in the brands to support their price positioning. However, in the long-term, EBIT is still expected to grow ahead of net sales, as before, and if sales come in at the upper end of the top-line range then the margin will start to drop through faster on operating leverage. Productivity savings were also increased from $1.5bn to $2.0bn. US recovery is underway; plenty of runway left in its biggest market Diageo had been gaining market share in the US for several years, but last year its share was flat and ytd its share is -20bps. However, management sees “some green shoots” in the US regarding holiday spending intentions, albeit Diageo will not pursue low-quality share gains in its aim to grow ahead of the market. Inventories at distributors are at healthy levels and in the on-trade Diageo is already gaining share. Despite being the largest in US spirits, household penetration is only 16% for its biggest brands. Innovation and new market opportunities support growth While there are multiple growth market opportunities for Diageo, we think China and India are the most compelling. International style spirits are still 3% of total beverage alcohol sales in China (5% of group sales), providing room to grow even if the economy slows further. India (11% of group sales) will see 150m new legal drinking age consumers enter the addressable market by 2030. Ready to serve branded cocktails in bottles (Negronis, Cosmopolitans etc.) for at home entertaining occasions are a new category expansion opportunity that cater to socialising and convenience trends. Early learnings from these launches in the US have been very positive, and further launches are planned for the H1 holiday season. In H2 there will be some new RTD launches as well. Zero alcohol provides another incremental growth opportunity. Tanqueray 0.0 is performing well with consumers looking for moderation in Spain and Italy. Interestingly, 80% of the brand’s consumers are new to the gin category and new to the Tanqueray brand. Guinness 0.0 is the fastest growing non-alcoholic brand in the global off-trade and is still available in only 5 markets.
The market has been very nervous about the health of the US consumer and what that might mean for Diageo. Meanwhile, the situation in Latin America has taken a turn for the worse and caught the company and the market by surprise. Demand in the LAC region has softened for Spirits in particular, and visibility into the channel is more limited following significant expansion into the traditional trade in recent years. However, on the positive side, these are typically smaller outlets that are likely not holding significant levels of excess inventory, so we believe the correction should be quick. We now expect H1E organic sales +0.2% & organic EBIT -1.7%, followed by H2E organic sales +5.0% (easier comps) & organic EBIT +7.2%. For FY24E, we expect organic sales +2.4% & organic EBIT +1.8%. This is well below the medium-term guidance, but we expect a return to 5-7% organic sales growth in FY25E against what will be very easy comps from FY24. It is clearly unhelpful that this profit warning has occurred so early into the new CEO’s tenure. However, the share price reaction looks overdone to us. Diageo is now trading 17% below its 10-year average NTM PE ratio. The last time the stock reached the current PE level was back in 2014. While we understand there are reasons to be nervous, this is a business with an excellent track record, a well-balanced portfolio of brands across various price points and categories and exposure to strong market positions in the key emerging markets of India, China, Brazil & Mexico, among others. Its medium-term growth ambition of 5-7% is faster than many other large FMCG companies. At our unchanged 3,900p TP, Diageo would trade on 22.5x CY24E PE, hardly demanding for those familiar with the stock’s history.
Over the past 3 months the market believed that, with its best-in-class profile, Diageo would have been less affected by the overall industry slowdown. Today’s profit warning shows the opposite. We prefer Pernod Ricard in the short term due to the U.S. normalization and its ability to capitalize on the rebound in China. There are still some downside risks for Diageo, but the significant setback today might create an attractive entry point for the stock.
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The US is the most important market for Diageo (40% of sales and 45% of profit), and the recent decision to change the company’s presentation currency to USD from GBP reflects this. The market is understandably nervous about a slowdown in the company’s largest market, but we think the current valuation overprices the impact of what is likely to be a temporary (and technical) issue. The shares have underperformed the FTSE100 and the Stoxx 600 Food & Beverage index year to date, despite no change to the medium-term fundamentals. The new CEO is experienced and already familiar with the business strategy. We view this underperformance as a buying opportunity. Diageo has a strong brand portfolio and a proven business strategy; both have been honed well over the last decade. Its growth has outpaced that of all other relevant Consumer peers in recent years. The Spirits category remains buoyant, and already looks to be improving in the US. Diageo is highly exposed to above-premium price points, with 30% of its sales in this segment. However, it also has 40% of sales coming from the mainstream Global Giants brands which provide a hedge if consumers do decide to trade down from higher price points. Management recently reiterated guidance at the September AGM. There will be a CMD in New York on 15th November. We believe the location is a deliberate choice and that the event will demonstrate the resilience of the company’s brands in the US. Both Diageo and Pernod have consistently indicated that the US should improve sequentially; Pernod is about one quarter behind Diageo on its slowdown trajectory and it expects Q1 to still be negative but to improve from there. Recent industry data shows encouraging sequential improvement in Spirits off-trade sales, suggesting resilient consumer demand.
The prospect of a US primary listing feels more likely than ever With a new American CEO, change to US Dollar reporting and 50% of profits generated in North America, Diageo is looking more and more like a US company. As such, it is perhaps not inconceivable that this UK-listed company (GB est. c.6% group EBIT) could seek to hop across the pond and establish a primary listing in the US. Diageo would not be the first to pursue a primary US listing Diageo would not be the first major UK-listed company to switch to the US, with several examples already YTD (within we explore the US listing moves of CRH, Ferguson and Flutter). On CRH, we note that the proposed change in primary listing to the US received 95% voting shareholder approval despite significant UK ownership (c.28% of shareholders, a similar proportion to that at Diageo). The rewards of a primary US listing likely outweigh the drawbacks... While the location of Diageo''s primary listing has no impact on the operational performance of the business, the prospect of: i) potential to tap into the more premium valuation of US distillers (i.e. Brown Forman); ii) likely indexation in the SandP500 and iii) increased ability to attract top management talent would likely outweigh the loss of a FTSE100 listing. ... however, Diageo is an important UK asset Diageo''s position as the largest exporter of Scotch Whisky, an important UK export, would likely mean that a shift in its primary listing would be politically sensitive. So, is a US listing imminent? No, but an eventual shift is a possibility While a case can be made, we do not expect an announcement any time soon. However, should valuation discrepancies continue, we believe that an eventual shift is a real possibility and unwittingly or not, Diageo has already started to prepare some groundwork by changing its reporting to US Dollars from FY24.
We were encouraged by the fact that premiumisation is holding up around the world (a trend also noted by AB InBev, another global Consumer company). Demand for tequila, a major driver of Diageo’s growth in recent years, is also resilient even as comps become tougher; tequila grew organic sales by 19% in FY23 and tequila has risen from 5% of sales in FY20 to 12% of sales in FY23. The CEO confirmed that there are plenty of opportunities to grow the size of the global tequila category from the current level. One of the challenges Diageo faced in FY23 was a capacity shortfall in Crown Royal Canadian whiskey (a brand which we estimate is nearly 15% of the North America division’s sales, the division’s biggest brand, where sales declined 10% in FY23) coupled with very difficult comps from restocking in the previous year. The capacity issue is being addressed with an additional $200m of capex for the brand and the comps will be much easier in FY24. The CFO confirmed that growth should accelerate sequentially during FY24 from the H223 rate (which was +3% for organic sales and +3% for organic EBIT), as the restocking comps fall away. We currently forecast H124E organic sales +4.3% and organic EBIT +5.4%, followed by H224E organic sales +7.1% and organic EBIT +10.2%. The valuation is undemanding vs. the historic range. Our unchanged TP implies CY24E PE of 21.2x – in line with the 10Y average NTM PE. With growth set to accelerate sequentially, we think the valuation should revert to the mean. Our DCF value is 5,285p, with our forecasts assuming the low end of M-T guidance. Next catalyst: a Capital Markets Day, the first since CEO Debra Crew assumed the role, is scheduled for 16th November. From FY24 Diageo will report in USD; an additional $1bn share buyback was announced with the FY23 results.
Summary of FY23 results FY23 results were broadly in-line with consensus expectations. LFL sales growth at +6.5% was c.10bp ahead of co. consensus expectations and this helped to drive LFL EBIT growth of +7.0% (co. cons: +6.3%). Absolute EBIT at GBP5,254m was -1.1% below co. consensus and this in turn led to basic EPS (bei) at GBP1.635 coming -0.9% below co. consensus. The FY DPS at GBP0.80 was -0.5% below co. consensus. News We highlight that Diageo believes that globally and, in the US, it ended the year with a healthy level of distributor inventories. Earnings We revise our FY24e/FY25e/FY26e EPS by -8%, -10% and -11% (reflecting a combination of EBIT revisions and below-the-line items; we elaborate within). Investment thesis While we can see attraction in Diageo, at present we struggle to argue for a re-rating. Rating and target price We maintain our Neutral rating. Our TP moves from GBP37 to GBP35.50 (the impact of our EPS revisions more than offsetting the benefit of roll-forward). 15 questions for management What assumption on the likelihood of a US recession underpins your comfort with US distributor inventories?
Despite a weak US performance, organic net sales growth reached the street’s expectations, driven by strong price/mix. In general, consumers have shown resilience in bearing the price increases. Excluding pressure on African beer volumes, organic volume growth was up +1%. The US distributor inventory levels returning to historical levels provide comfort.
Broadly in-line for FY23; better outlook for the US in FY24 The full year results are slightly ahead at the top-line & EBIT level and a very tiny miss at EPS level. FY23 organic sales of +6.5% (Vuma consensus +6.4%) is in-line with expectations (volumes were -0.8% and price/mix was +7.3%). Organic operating profit +7.0% (consensus +6.3%) is modestly ahead of expectations with 15bps of organic margin expansion. Adj. EPS of 163.5p (consensus 164.9p) is light by less than 1% so is essentially an in-line result. The dividend is raised by 5% while adj. EPS grew 7.6%. FCF of £1.8bn is considerably below the consensus of £2.2bn. The outlook for FY24 is for growth to be in-line with the medium-term guidance (of 5-7% organic sales growth & 6-9% organic operating profit growth), with H2 stronger than H1 given the comps, but H1 will nevertheless be an improvement on the softer H2 just reported. Diageo will also begin reporting in USD rather than GBP from FY24. A new $1bn buyback is announced for FY24. The North America division delivered flat organic sales growth in FY23, after having delivered +3% in H1. All the decline was in US Spirits (-1%), as Beer and Canada grew. Tequila still grew 15% in North America, but vodka, RTDs, Johnnie Walker, Crown Royal and Bulleit all declined. The company states that demand is normalising and that inventory levels at distributors are now back to normal levels there (depletions had been 2% better than shipments, indicating resilient underlying consumer demand). All other regions delivered solid growth over the FY, and Europe even accelerated sales growth in H2. There is a pre-recorded presentation that will be available at 7:15am BST followed by a Q&A conference call session at 9:30am BST.
This investor event was the first time Debra Crew has presented to the investor community since being announced as Ivan’s successor. We thought she handled difficult questions about the US slowdown very well, addressing them in as much detail as she could provide at this time of the year. Diageo has suffered some further share loss in the US off-trade retail channel, but the on-trade channel remains resilient. Diageo price increases on US tequila have moderated growth in the short-term, but will benefit the business over the longer term. There is some softness at the high end and low end of the US market, but it is still expected to grow mid-single digits, with Diageo taking share as previously communicated at the 2021 CMD. Recent results from ShuiJingFang revealed a weak CNY, though consumers are slowly starting to spend again. Our FY23E/24E EPS is trimmed 4%/3%, partly due to FX. Scotch is a major growth driver of the business, and Diageo’s largest single category exposure (27% of sales). The category is the second largest in International Spirits, after Vodka, and the largest category at premium-plus price points. It has a broad geographic footprint and Diageo is present in all regions with its blends and malts. Scotch grows about 100bps faster than the global TBA market. Diageo is the global leader in Scotch with c. 40% market share – nearly twice the size of the next largest player. Diageo has evolved its Scotch marketing over time, introducing new brands and line extensions. Latin America and the Caribbean (LAC) have grown Scotch at the fastest rate of any region over the last 4 years (+15%, ahead of Greater China at +10%). Consumers in the region skew to premium-plus price points in Scotch and 2/3 of Diageo’s LAC A&P spend is behind its Scotch brands. Amazingly, Diageo drove over 70% of Scotch category value growth in the region over 2017-2022 and the company now has a regional market share in Scotch of 70%.
Debra Crew to replace Sir Ivan Menezes The Board has announced that Ivan Menezes will step down as CEO at the end of the current financial year and will be succeeded by Debra Crew. Menezes has been at the helm for the last decade (having joined Diageo in 1997) and it is not surprising timing for him to step down now given Diageo’s strong recent performance and the fact that he has already laid out credible long-term targets for the group. Crew has been with Diageo since 2019 and is a veteran of the large cap FMCG industry. She successfully grew and sold Reynolds American to BAT and Imperial Brands in 2017. Her prior experience includes PepsiCo, Kraft Foods, Nestle and Mars. We think investors will consider her to be a safe pair of hands and experienced. When thinking about who might eventually succeed Menezes, she was always on the shortlist in our minds. We think it is helpful that any uncertainty around succession has been clarified. While at Diageo, Crew has held the positions of Board member, President, Diageo North America and Global Supply and Chief Operating Officer. Crew’s appointment will result in the Diageo Executive Committee becoming more than 50% female. Diageo is already ranked #1 in the UK (and #2 globally) by Equileap’s 2023 Gender Equality Report.
US slowdown a temporary blip. Management stressed both on the conference call and during the subsequent sell-side analyst roundtable that the US consumer is not trading down and demand is solid. There was slightly weaker execution in the US off-trade, which led to slight market-share loss, but this was a fairly minor issue and is expected to improve going forward. The key driver of volumes, -4% in North America (and -6% in US Spirits), was the cycling of very tough comps from when distributors and retailers re-built their inventories as COVID restrictions eased. Diageo actually gained share in the US on-trade, reflecting healthy consumer demand for its brands. Elsewhere in the markets demand is strong. The consumer has been surprisingly strong in Europe during H1 (volumes flat, sales +10%). India remains solid (volumes +7%, sales +11%). Chinese New Year was better than expected, and China volumes were +2% in H1 despite restrictions in place for much of the period. SE Asia (volume +44%) is rebounding quickly and even South Korea is delivering good growth (Windsor volume +56%), albeit off a weak base. LatAm was also strong (volume +6%, sales +20%). Management left FY guidance unchanged. We forecast FY23E organic sales +7.0% and organic underlying EBIT +8.0%, in line with guidance. Valuation. Diageo is the largest Spirits company in the world by sales and the third largest by market cap. It is also probably the most diversified Spirits company across geographies and categories. In spite of this, it is currently trading at a discount to all major Spirits companies except Pernod. The DCF returns a fair value of 4,112p. We leave our 3,900p TP unchanged; this implies a CY23E PE of 22x, which we feel is very achievable based on peer comps and Diageo’s historic range.
Summary of H123 results While both LFL sales (+9.4% vs. VA cons. at +7.8%) and LFL EBIT (+9.7% vs. VA cons. at +7.4%) were ahead of consensus, EBIT at GBP3.2bn was broadly in-line (+0.6% vs. VA cons.) and EPS (basic bei) at GBp98.6 was c.-1.4% below. As to the shape of the delivery, while LFL revenues were materially ahead of consensus in Europe and Turkey, Africa and Latin America and Caribbean, both Asia Pacific (-3.9% vs. VA cons.) and North America (-3.8% vs. VA cons.) were materially below. News We highlight that January has started well across the world, including in Europe. Earnings We revise our FY23e/FY24e/FY25e EPS by c.(2)%-(3)%. Investment thesis While we can see the long-term attraction in Diageo, given building investor nervousness on the nature of normalisation in US Spirits, we believe a re-rating will prove elusive near-term. Rating and target price Reflecting our EPS revisions, our TP moves from GBP40 to GBP38.50. We maintain our Neutral rating. 15 questions for management You commented upon 75% of the business holding or gaining share, what would this number be if you consider volume as opposed to value shares?
North America looks to be a concern following what seems to be a clear slow down. Nevertheless, overall organic net sales exceeded the consensus, as did operating profit. Tomorrow’s report from Remy tomorrow will help to draw some conclusions.
Minor bottom-line beat, but solid top-line indicates robust consumer demand Interim adj basic EPS of 100.9p is 1% above the Vuma consensus of 99.9p. Organic volumes +1.8% in H1 (consensus +2.5%) are slightly weaker than expected, but this is offset by much better price/mix. Organic net sales growth of +9.4% (consensus +7.9%) is comfortably ahead of expectations. Adj. EBIT of £3,194m (consensus £3,192m) is an in-line result. FCF was £817m (consensus £1,705) which was weaker than expected; this is mainly due to higher working capital outflows and higher cash tax. The interim dividend is nevertheless raised 5%, reflecting confidence in the balance sheet (leverage at 2.5x EBITDA) and growth prospects. US slowing a bit? By region, North America was a little low at just 3% organic growth in H1 (consensus +6.4%). Europe, Asia Pacific and LatAm & Caribbean all grew organic sales at a double digit rate. The US could potentially worry the market, but we note looking back that longer-term industry growth in the US has typically been 3-4%. Outlook unchanged The outlook is reiterated. As a reminder, the medium-term guidance is organic sales growth of 5-7% and organic underlying EBIT growth of 6-9%. Consensus currently expects FY23 organic sales +6.8% and organic EBIT +6.9%. We therefore expect consensus to move up only very slightly.
Summary of FY22 results A strong set of results from Diageo. FY22 LFL sales growth at +21.4% was c.4% ahead of co. consensus (H2 was c.8% ahead) with all geographies beating (North America was 3.7% ahead, Europe and Turkey was 4.8% ahead and Latam and Caribbean was 11.5% ahead). Turning to profits, LFL EBIT growth at +26.3% was 4.3% ahead of co. consensus and this in turned helped to drive a +5.7% EBIT beat and +6.4% earnings beat. News We highlight that Diageo has not yet seen any US slowdown or downtrading and that US on-trade trends remained strong in July. Earnings We revise our FY23e / FY24e / FY25e EPS estimates by c.+3-4% Investment thesis We believe that both Diageo and Pernod Ricard have scope to re-rate within a Staples context given the superior structural growth that they offer. Rating and target price We maintain our Outperform rating; our target price remains unchanged at GBP45.30. 15 questions for management What do you say to the thesis that we are seeing a temporary post-Covid carpe diem effect and the consumer is about to hit a wall?
A reassuring end to the year, with a FY22 beat. The cautious tone for FY23 had been expected given the elevated levels for 2022, but the mid-term (FY23-25) guidance was reiterated. In our view, Diageo remains a core holding given its superior execution and capital allocation.
FY22 finishes strongly FY22 organic revenue +21.4% (consensus +17.5%) is comfortably ahead of expectations. Organic volumes were +10.3% (consensus +8.5%), with price/mix +11.1%. All regions beat their respective consensus organic revenue growth expectations and all regions grew organic revenue by double digits as markets recovered. In the important North America division, volumes were +3% with organic sales +14%, and the organic operating margin was -295bps as Diageo invested strongly behind its brands and price increases only partially offset inflation. Organic EBIT growth +26.3% (consensus +22.1%) is also a solid beat. At the bottom-line, adj EPS of 151.9p (consensus 142.8p) is a 6% beat. Medium-term outlook reiterated, in-line with consensus The outlook expects a “challenging” environment” but reiterates the medium term outlook of 5-7% organic revenue growth and 6-9% organic EBIT growth over FY23-FY25. For FY23, consensus models +6.3% organic revenue and +7.1% organic EBIT growth. North America, Asia Pacific, Africa and LatAm & Caribbean are expected to continue growing the top-line in FY23, but Europe is expected to decline after the strong 30% growth in FY22. The organic operating margin is expected to expand due to ongoing premiumisation and operating leverage. Management hosts a conference call at 9:30am BST. A pre-recorded presentation is available on the company website ahead of this.
Summary of H122 results A strong set of results from Diageo with LFL sales, LFL EBIT and EPS all coming pleasantly ahead of Visible Alpha consensus expectations. To be more specific, LFL sales growth at +20.0% was c.3% ahead, LFL EBIT growth at +24.7% was c.4% ahead and basic EPS (bei) at GBp85.6 was c.3% ahead. While the interim dividend at GBp29.36 was somewhat below (VA) consensus (GBp32), it was in-line with our own expectation. News We highlight that Diageo has brought forward the end of its SBB plan to the end of FY23 (previously end FY24). Earnings We revise our FY22e/FY23e/FY24e EPS by c+4 to +5% reflecting both the H122 beat and perception of management''s confidence in the momentum of the business. Investment thesis We believe that in a broader staples'' context, the structural growth on offer at Diageo is not fully valued and on this basis we see scope for a re-rating. Rating and target price We maintain our Outperform rating. Reflecting our earnings revisions, our target price moves from GBP47 to GBP49. 15 questions for management You previously commented that a relaxation of Indian tariffs could be a ''big bonanza'' for the industry. What are your latest thoughts on the trade discussions?
The slight sales and EBIT beat is praised. The absence of FY21 guidance slightly darkens the picture but, overall, the figures send a good signal for the industry.
Executing well with the wind at its back Organic net sales growth of 20.0% (consensus +17.1%) is comfortably ahead of consensus, with all regions growing top-line at a double-digit rate. Growth was boosted by the on-trade recovery and continued strong outperformance of the Spirits category, in addition to Diageo’s own market share gains. Diageo grew or held share in 85% of its net sales value in measured markets. EBIT grew organically by 24.7% in the half (consensus +20.6%). The company had previously issued guidance for organic EBIT growth of “at least 16%” with the late November CMD statement, so a strong result had been expected – but this appears to be much stronger than anticipated, with 131bps of organic operating margin expansion. Price increases, productivity savings and operating leverage helped to more than offset marketing spend ahead of organic sales growth. Adj EPS of 85.6p (consensus 82.5p) is a 4% beat. The interim dividend is raised 5%. Net debt/EBITDA was 2.5x as at 31st December. The company completed £500m of share buybacks in the half, and is now bringing forward the timeline to complete the £4.5bn buyback sometime during FY23. The outlook suggests confidence in the business momentum over the second half, and the medium-term guidance is reiterated. Consensus currently looks for 13.9% organic net sales growth and 18.6% organic EBIT growth over FY22. This appears well under-pinned and is likely to nudge up by 3-4%. The pre-recorded presentation by management is on the website and the live analyst Q&A call is at 9:30 GMT.
We had been concerned that consumer demand for premium Spirits might falter in the pandemic-related economic downturn. However, the opposite has occurred as consumers have been even more willing to treat themselves to expensive ‘simple pleasures’ – both at home and out of home – than they were before. In most markets, volumes and sales of Spirits are already back above pre-pandemic levels. Furthermore, Diageo is reaping the benefits of its investments into marketing and execution tools. These give the company a competitive advantage in the marketplace, and are a key enabler of management’s target to increase its category market share from 4% today to 6% by 2030. Our adj basic EPS forecast rises 6% to 135.8p in FY22E; we raise by 7% to 152.7p in FY23E and by 8% to 166.9p in FY24E. We had been lower than consensus, so we expect consensus will be moving up by less than us. Diageo is making good progress on ESG-related initiatives including gender diversity, waste, biodiversity and emissions. We believe this is supportive for the share price as investors increasingly demand better ESG characteristics from their portfolios. We raise our target CY22E PE multiple to 26.5x (10yr NTM PE avg. 20.2x) to obtain our new 3,800p TP (prev. 3,300p). We note there is still over 10% downside to the fair value implied by our DCF (WACC 7.1%, terminal growth rate 3.0%). Some possible positive catalysts include Indian tariffs on imported Scotch coming down, Global Travel Retail recovering and the availability of meaningful M&A targets. Possible negative catalysts include rising gas prices in the US putting pressure on consumer spending and further lockdowns affecting the on-trade channel’s recovery.
We were impressed with Diageo’s presentation as it once again demonstrated its ability to outperform the spirits market, which is itself in a strong position to outperform the drinks industry. Buy and hold.
Last week’s Q3 2021 IMS signalled further write-backs in Q3 2021. We see this as unsurprising given OSB’s ultra-conservative balance sheet provisioning in 2020 (Figs 1 & 2 of full report). We forecast a net write-back of £3.1m in H2 2021e (Fig 3), but given yesterday’s 4.3% print for the UK unemployment rate it could be higher. Moreover, given OSB’s ultra-low-risk secured loan book (Fig 4) we expect OSB’s “normalised” impairment charge to remain <0.1%. There are few surprises in the OSB growth story. Loan book growth of c.8.3% in the 9 months to 30 Sept (Fig 6) reflects a combination of robust originations (Fig 5) alongside strong retentions. Given OSB’s caution in more cyclical product lines, growth has become even more buy-to-let-led. Indeed, at 30 June, buy-to-let of £14.4bn represented c.71% of OSB’s loan book, (Fig 7) yet only c.5% of the c.£280bn UK buy-to-let market. The Net Interest Margin rose to 2.68% in H1 2021 vs 2.50% in H1 2020, (Fig 8), primarily reflecting the benefit of lower funding costs. Our forecast of 2.69% for FY 2021e is marginally below reaffirmed guidance of c.2.70%. Robust loan growth, strong NIM and OSB’s low-cost operating model combine to give a sector-leading cost:income ratio of 25.0% in 2021e, which we forecast will improve further to 24.2% by 2023e (Fig 9). We forecast u/l EPS of 82.7p/84.6p/96.6p in 2021/22/23e, seemingly 6%/13%/18% ahead of Bloomberg consensus (Fig 13). Given OSB’s “extreme” capital surplus (CET1 capital ratio 18.7% at H1 2021 (Fig 11)) we model buybacks of £100m p.a. through 2022/23e and a step-up in payout to 35% from 2023e; a prospective 6.8% dividend yield. On 0.97x 2023e tNAV (Fig 14) for u/l ROTEs of 22.7%/20.2%/20.2% 2021/22/23e (Fig 15), Buy reaffirmed, TP raised to 730p (from 675p).
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Faster trajectory expected, underpinned by category growth and share gains Diageo’s Capital Markets Day revealed an optimistic outlook for the future. The company plans to significantly grow its share of the global Alcohol market from 4% in 2020 to 6% by 2030, augmenting the underlying growth of the category (which management thinks could grow 3-4% over that period). Household penetration of Spirits in Diageo’s largest market, the US, is still only at 50%; in China the penetration of Western Style Spirits is still extremely low at around 3%. Over half of the growth in the US Spirits category over the next 5 years will come from tequila. As reported earlier in the day, Diageo management now targets 5-7% organic net sales growth and 6-9% organic EBIT growth over the FY23-25 period, implying modest upgrades to consensus. A chart overleaf shows this growth rate is realistic. Reliance on tools, productivity to drive margin expansion The margin expansion over FY23-25 will be enabled by £1.2bn of gross COGS, marketing and overhead efficiencies. Management spent a lot of time discussing its marketing strategies and tools, which have been the subject of much investment in recent years. The Catalyst marketing efficiency tool has delivered an impressive £400m of incremental gross profit since 2017, and allowed the company to stay nimble with its marketing during the Covid-19 crisis. In Colombia, the EDGE execution tool has resulted in a 35% uplift in sell-out at the outlets where it has been implemented. Diageo also recently opened a customer collaboration centre outside of New York City. Other opportunities Regarding M&A, the company has made 12 brand acquisitions in recent months, and will continue to look for attractive bolt-ons. A strategic review of the domestic Indian whisky portfolio is currently underway, which could result in some disposals. Management does not assume any change in Indian Scotch tariffs in its medium term guidance.
Post CMD thoughts In this report we summarise our thoughts and estimate revisions post Diageo''s recent CMD. Takeaway 1: ''The best is yet to come'' If we were to summarise the main thrust of the CMD in one phrase it would be the above comment from CEO, Ivan Menezes. Takeaway 2: Confidence in the new mid-term growth target (+5-7%) We note that Diageo appeared very confident in delivering its new mid-term organic sales growth target. As to the drivers behind this, they are as follows: spirits gaining share of TBA; premiumisation; Diageo''s now more advantaged portfolio (leader in 4 of the 5 fastest growing spirits categories); premiumisation (54% of its business now being in premium plus and 25% in super premium plus) and it having built the (digital) capabilities to be able to execute much better. Takeaway 3: Not concerned on macroeconomic pressures We note that Diageo did not appear unduly concerned on the impact of inflation starting to put consumer budgets under pressure. Taking one topical example, it highlighted that its Scotch portfolio has been outperforming both spirits and TBA in Latin America. Takeaway 4: Expect further MandA Diageo highlighted that one should expect further MandA and that it has been a significant growth driver over recent years (e.g. Casamigos contribution to US growth). This said, it will remain picky. Estimate revisions We revise our FY21e/FY22e/FY23e EPS by +3-4% reflecting near-term / mid-term guidance. Conclusion Revelatory CMD? No. A confident, well positioned company? Yes. TP to GBP44 from GBP43. Outperform.
Raising medium-term targets at the CMD In conjunction with today’s Capital Markets Day, management has raised the medium-term guidance to reflect the strong global demand backdrop for Spirits. Over FY23-FY25 Diageo expects to deliver organic net sales growth of 5-7% (vs. 4-6% in FY16-FY19) and organic EBIT growth ahead of this at 6-9%. In H1, organic net sales growth is expected to be ‘at least 16%’ (latest Vuma consensus +12%) and organic EBIT growth is expected to be ahead of this. We think that the FY22 consensus will come up to reflect the strong H1, but we expect the upgrade to the medium-term forecasts may be less significant. The valuation at 28.3x CY22E PE already assumed some upgrades were imminent, so we think the impact on the share price will be limited. Nevertheless we see this as a positive development, reflecting the strength of the category and Diageo’s position within it.
Strong start, no surprises in Q1 Management issued a trading comment in conjunction with the AGM to be held later today. The year is off to a ‘strong start’ despite supply chain constraints and rising inflation. The North American market remains very resilient and other markets continue to rebound, though there is uncertainty about the pace of recovery in a few of these, with some volatility expected in the near-term. Margins in FY22 are still expected to benefit from the factors laid out at the FY21 results in late July: operating leverage on the rebound, positive channel mix, and ongoing premiumisation. Against this, marketing spend is rising and there is well-known cost inflation across the supply chain. Overall, the statement today is reassuring and we expect no change to consensus estimates at this stage. Our Sell recommendation is based solely on valuation.
Summary of FY21 A strong end to the year for Diageo with FY LFL sales growth at +16.0% coming c. 230bps ahead of consensus expectations (co. cons: +13.7%). Scanning FY LFL growth by region, the main surprises relative to consensus came in North America (+20.2% vs. co. cons. at +15.6%) and Latin America and Caribbean (+30.1% vs. co. cons. at +15.0%). On a less positive note, Asia Pacific was +13.6% vs. company consensus at +17.7%. LFL EBIT growth at +17.7% was c.200bps ahead of company consensus. News We highlight that Diageo believes that the prospects for a UK/India trade deal are more promising than ever. Earnings We revise our FY22 / FY23 / FY24 EPS estimates by c.(2)%, the variance in part reflecting a higher tax rate assumption. Investment thesis We believe that both Diageo and Pernod Ricard can re-rate over time as the market starts to properly appreciate the good long-term growth potential that spirits offer relative to other consumer staples'' sub-sectors. Rating and target price We maintain our Outperform rating. Our target price moves from GBP44 to GBP43. 15 questions for management You commented that you believe it is possible that there could be a post pandemic uptick in US market growth. Can you please explain what underpins your belief?
It seems that Diageo’s solid FY21 wasn’t enough to keep the share price up (-2.5% at the opening), but this does not extinguish our confidence in the group. Admittedly, the guidance, which is only qualitative, may seem insufficient and, yes, Diageo is the first spirits group to express concerns about a future decline in the off-trade (ultimately not very surprising!), but we believe that the current positive momentum should continue to drive sales levels above those of 2019 in the months to come.
Providing guidance for double-digit EBIT growth Heading into the end of its financial year, management feels confident enough to issue explicit guidance of ‘at least 14%’ organic EBIT growth in FY21 (to June). Our forecasts, which are now under review, had expected +8.3%. Consensus according to Vuma expected +10.3%. Diageo has also announced a re-commencement of its share buyback programme of up to £4.5bn (£1.25bn has already been purchased prior to the suspension), which is now extended to run until the end of June 2024. The company expects to be at the higher end of the 2.5-3.0x net debt/EBITDA level by the end of the programme. Performance has been stronger than expected across the Spirits sector through the crisis, and within that Diageo has been a relative outperformer. North America has been the standout region for the company, but execution has also been strong in tougher markets like Europe and some of the emerging markets. Our forecasts and TP are under review, but should be moving up.
Excluding Global Travel Retail, Pernod would have grown organic sales by 1% in H1 (vs the -3.9% the company reported). The sequential improvement from -5.6% in Q1 to -2.4% in Q2 despite increased restrictions around the world is reassuring – and reflects better trends in China and India, but the overall performance is still considerably weaker than Diageo reported. Pernod gained or held share across the markets of W. Europe, but it lost share in the US due to its exposure to the on-trade, which is higher for the company than the industry average. Hence why Pernod reported just 5% organic sales growth in the US over H1, while Diageo reported +15% in its US Spirits business. Pernod management commented that the US on-trade channel is tracking down 20-40% below the year ago level of sales. The outlook remains uncertain in light of the continuing on-trade restrictions across many of Pernod’s markets. The company is guiding for growth in organic sales over FY21, but margin expansion is likely to be limited given channel mix headwinds and rising A&P expenditure. Longer term, management expects to resume delivering 40-60bps of operating margin expansion each year. In the current quarter, we are concerned about the level of demand over Chinese New Year. Citizens are being discouraged from travelling home over the holidays by the government, and companies are paying employees to stay in cities. It is unclear if people will still celebrate in the same way as usual while being located far apart from their families; there may be a negative impact on Spirits sales. The sell-in to Chinese New Year has been good, both Diageo and Pernod confirmed, but the sell-in happened in November and December, according to Pernod, before most of the measures were announced.
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Diageo is having a good crisis. Excluding one-off pressures in Global Travel Retail and keg sales to the on-trade, organic sales growth would have accelerated to 6% in H1, roughly in-line with pre-crisis growth rates. This demonstrates how Diageo has been able to pivot to the off-trade channels and deliver market share gains in key markets, including the US and Europe. Overall, Diageo held or gained share in 70% of its sales in measured markets. Some brands that did particularly well over H1 were Bulleit (organic sales +15%), Crown Royal (+3%), Baileys (+10%), Captain Morgan (+7%), Don Julio (+39%) and Casamigos (+135%). The company has been helped by its high exposure to the US market (36% of sales/45% of EBIT), where consumer demand has been resilient across a wide swathe of categories during the crisis – but especially so for Spirits. Management expects the strong US growth to continue (consumer off-take of Diageo’s brands in H1 was in the mid-teens), but there is clearly a risk that momentum eases somewhat, if for no other reason than the comps become more difficult from the second half of calendar 2021. Management has flagged increasing A&P intensity going forward, after it cut spend during last year. The on-trade recovery is likely to be slow, given capacity restrictions, so margins may not return to prior levels in the near term. Quality should be rewarded. Better organic sales growth in H1 and a positive tone from management about the longevity of this trend leads us to expand our target multiple on the stock. Even so, we cannot get to the current share price, and our DCF still shows considerable downside – even tweaking up the terminal growth rate to unrealistically high levels. We maintain our Sell recommendation on valuation, whilst acknowledging the strong performance.
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Summary of H121 results H121 results were meaningfully ahead of consensus expectations at both the top-line and the bottom-line. LFL sales growth at +1.0% was c.6% ahead of consensus (Visible Alpha) with all segments apart from Europe and Turkey meaningfully ahead of consensus. North America posted +12.3% LFL sales growth vs. consensus at +5.8%. With the underlying margin at -1.9% YOY broadly in-line with consensus, the c.6% LFL sales beat translated into a c.6% EBIT beat. Basic underlying EPS at GBp69.9 was c.4% ahead of consensus. While DPS at GBp27.96 was c.9% below consensus, it was in-line with our own expectation (GBp28). News We highlight that US spirit shipments (+15% LFL sales growth) were around 3% ahead of depletions and this was worth around 1.5 %-points of growth at the group level. Earnings We revise our FY21e/FY22e/FY23e EPS by c.+3-4%, primarily reflecting improved operational estimates. Investment thesis We believe that both Diageo and Pernod Ricard can re-rate over time as the market starts to properly appreciate the good long-term growth potential that spirits offer relative to other consumer staples'' sub-sectors. Rating and target price We maintain our Outperform rating. Reflecting our EPS revisions, our target price moves from GBP35 to GBP36. 15 questions for management Why is CFO Kathy Mikells leaving Diageo?
The H1 results came in ahead of consensus, helped by Greater China and an exceptional US performance. No FY21 guidance for now, but H2 should show positive growth thanks to strong comparables. We reaffirm our strong confidence on the stock.
DIAGEO - BUY | 3510P(+16%) Exceptional growth on the US market Full year sales well above forecasts… H1 EBIT margin down 190bp No guidance provided
North America leads the way again Organic sales +1% solidly beat consensus of -4.6%. All regions improved sequentially in H1 compared to H2. North America remained exceptionally strong at +12.3% and Asia Pacific -3%. The Global Giants brands were -7%, while the high end Reserve portfolio was +15%. Organic operating profit -3.4% was also well ahead of expectations for -10.6%, as cost efficiencies helped. The organic operating margin contracted by -153bps (consensus -223bps) as channel mix and category mix weighed on the margin, and cost efficiencies were not sufficient to fully offset these pressures. Adj. basic EPS of 69.9p is 3% ahead of consensus (of 67.8p) and the dividend was raised by 2%. Net debt/EBITDA rose to 3.4x in H1, above the 2.5-3.0x targeted range, as had been flagged by management at the FY results. Outlook Management continues to not provide an outlook for FY21 sales growth. However, organic EBIT growth in H2 is expected to outstrip sales growth. Management expects leverage to remain elevated for the balance of the year, above the targeted range. We expect consensus forecasts will be nudged up, but only slightly. Management will host a Q&A call with analysts at 9:30am UK time. Ahead of this, a pre-recorded presentation by management will be available on the company website.
The company’s listed EM subsidiaries have reported better-than-expected sales trends in the latest quarterly updates. India sales are down only c. 3% on an underlying basis, China sales are up nearly 20%, and Nigeria sales are up nearly 12%. Profits are not as robust, due to adverse mix and A&P spend. The US Spirits market has proved incredibly resilient through the crisis; Diageo’s new head of North America underscored this on a recent regional update call. The US market is growing close to 10% y-o-y, significantly higher than the c. 4% growth reported in recent years; within this, premiumisation is driving unusually strong price/mix of 5%. There is “some” element of retailer re-stocking in the growth figure, so the underlying performance is a little lower – nevertheless it is clear the US is performing very well. This may be the result of the relatively more resilient economy (as the market opened up more quickly than many other developed markets), lower gas prices and the boost from stimulus payments earlier in the year – all of which may be leading American consumers to feel more confident about spending. We now expect FY21E organic sales to grow 5.7%, after falling 8.3% in FY20; but this still implies that FY21E net revenue will be below the FY17 level and FY21E EBIT will be below the FY18 level. Relative to our prior expectations, our FY21E adj. basic EPS increases by 5% to 111.2p and our FY22E adj. EPS increases by 4% to 119.5p; for the H1 period, which is normally reported in late January, our adj. basic EPS estimate is 65.4p. Our TP rises to 2,400p (from 2,150p) to reflect our changed estimates and more robust performance in some of the company’s key markets. We apply a CY21E PE of c. 21x to derive our TP; this is in-line with the average rating on the stock over the past 5 years.
Positive news from India and the US Organic sales set to drop 2.5% in H1 vs -14.4% previously Lifting our EPS forecasts by 5% over the next three years
DIAGEO BUY | 3330p vs. 3410p A good start to the year The US outperforming Buy reiterated
Q1 trading update reveals better US trends Diageo has released a short Q1 trading update in conjunction with its AGM. Performance has improved since the FY21 guidance was first issued at the end of July. Organic sales and operating profit growth have improved since the H2 level (of -23% and -42%, respectively), helped by better trends in the important US market (c. 45% of group EBIT) including some off-trade re-stocking. Other markets are less robust, but moving in the right direction slowly. However, the guidance for H1 continues to expect lower organic sales and operating profit compared to the previous year. We think the backdrop for Spirits is still extremely fragile and make no changes to our estimates at this time. We currently model H1 organic sales -15% and organic EBIT -22%.
Organic sales trends improved sequentially in July, from the -40% organic sales observed in Q4 (to the end of June). We expect Q121E organic sales at -20% and Q221E organic sales -10%, as we assume a subdued holiday season with less socialising than usual, which results in H121E organic sales -15%. H221E organic sales should improve further to +17%, but this still leaves FY21E -2.3%; our FY21E organic EBIT is -0.8% (H1 -22%, H2 +53%). Multiple market dynamics cause us to maintain a cautious outlook on the pace of recovery. Africa is extremely weak, with the sale of alcohol banned in South Africa and the on-trade shut in Kenya, a key market for Diageo. Consumers in Latin America and India are trading down, and the on-trade remains shut in India and Colombia. Europe will be hit by the loss of tourist traffic to the on-trade. These pressures offset the resilient performance of the US market. A&P intensity will pick up after a brief hiatus during lockdowns; we model marketing expenses as a % of sales at 16.1% in FY21E (FY19: 15.9%; FY20: 15.7%). Despite top-line challenges, management expects to continue investing in capex and inventories should remain at similar levels to FY20. Although there was no specific guidance on FY21 margins, management confirmed that the H1 operating margin would improve sequentially from the H2 level, but be down y-o-y. Our adj. operating margin estimates: H121E: 31.8% (-298bps y-o-y); H221E: 28.5% (+668bps y-o-y); FY21E: 30.2% (+49bps y-o-y). Input cost inflation is not likely to be significant in FY21. We maintain our target price at 2,150p, which implies a CY21E PE of 19.6x. In our view, this rating appropriately balances the long-term attractions of Spirits as a category (offering a premium to Beer & Soft Drinks) with the medium-term risk of disappointment from weak consumer disposable income.
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FY20 top and bottom line missed expectations and Diageo didn’t provide guidance for next year. Improvements expected in the coming months thanks to lockdown restrictions easing, though the margin should still be under pressure for the next six months.
Full year results slightly below forecasts… … due to all regions except North America No guidance provided for 2020/21
Diageo finished the financial year with adjusted earnings dropping 16.4%, a 1.3% beat vs consensus. Free cash flow declined 8.3% from FY’07 to FY’08: this time is quite different with free cash flow declining 37.4%, a 19.1% miss vs consensus but still beating our street low estimate. The dividend grew 2%, signalling confidence in the future but hampering our hope for needle moving, opportunistic M&A. Guidance was understandably light but we would flag that 2H organic sales declined 23%, the company exited Q4 with a decline of -39% but we should see sequential improvements from here. The company says leverage should be above 3x net debt / EBITDA through FY’21, in line with our estimates. While it was a tough finish to the year, we have confidence in Diageo’s ability to manage this.
The market hopes for a swift recovery in Spirits later this year, as evidenced by the valuations being near all-time highs. Management teams are, for the most part, abandoning guidance, and all expect calendar Q2 will be worse than calendar Q1. Recent off-trade scanner data from the US market is encouraging, but companies caution that this data does not reflect the whole off-trade channel which is less buoyant than the headlines suggest. Once restaurants and bars re-open, volumes will still be lower than previous levels. Establishments will need to serve fewer customers at a time, and many outlets will have decided to close altogether; we note Restaurant Group’s recent decision to close 125 of its sites in the UK. Consumers may choose to socialise differently going forward, too. On-trade activity in China, the first market to re-open, is still well below pre-crisis levels. We remain concerned about the 1-3% mix tailwind from premiumisation that has boosted Spirits sector growth over the last few years. This is now becoming a headwind as consumers re-prioritise spending, and trade down to mainstream brands. It is unlikely volumes can make up for this as people will not necessarily be drinking more. In some emerging markets (especially in Africa and India), there is also the risk of economically stressed consumers slipping out of the formal market into illicit/homebrew. We cut our Diageo forecasts following the recent updates from its listed subsidiaries and our conversations with the company. Our FY20E adj basic EPS is cut by a further 5% to 107.4p (slightly below the latest FactSet consensus); our FY21E adj basic EPS is cut 4% to 101.4p – still significantly below the FactSet consensus of 120.0p. Our Diageo TP is unchanged. We make no change to our forecasts or TP for Pernod. We retain Sell recommendations on both stocks.
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The on-trade channel will be virtually unrecognisable post lockdowns, and this is c. 50% of global Spirits sales. More than half of establishments are reportedly at risk of going under, and those that remain will be able to service a more limited number of consumers. Bar and nightclub culture may be gone for several years, and festivals, concerts and other “3rd spaces” will also suffer from ongoing social distancing measures; these channels are important for Spirits. Governments are worried about a second spike of cases in the autumn, so we expect a very slow and measured re-opening across markets. Inventories in the channel are high. The economic repercussions of the lockdowns will be job losses and lower consumer disposable income. We believe this will lead to trading down across many categories, including in Spirits, a reversal of the 1-3% mix tailwind the industry has enjoyed in recent years. Prices on mainstream premium Spirits, a highly competitive category, are likely to come down in order to maintain market share. We have already adjusted our forecasts for Diageo and Pernod, and are more bearish than consensus. We do not expect sharp cost cutting from either company in response to the crisis, so there will be operating de-leverage. Our FY21E adj EPS is 16% below consensus for Diageo and 20% below consensus for Pernod, and we see further downside risk to our numbers. We currently assume the lockdowns impact less than 3 whole months of 2020, followed by a slow recovery, but the impact could be much more negative. A sensitivity table to lockdown durations is on page 12, having analysed the cost base. On the positive side, balance sheets are in reasonable shape, and even our more bearish forecasts result in net debt/EBITDA of only about 3x over the next 2 years assuming no major change to dividend policy. We do not expect any meaningful alteration here – unless trends worsen substantially. We prefer the more defensive areas of Consumer Goods; these include the highly resilient Tobacco companies, and HPC and Food names that are beneficiaries of social distancing. These companies are still growing, and dividends look relatively safe.
Management has suspended the share buyback programme, so we now assume no share buybacks beyond January 2020. This is a large driver of our FY21E EPS downgrade, in addition to the organic deterioration. We expect management will do all it can to preserve the current dividend level during the next 2 financial years, as it did during the clampdown in China in 2013-15. The balance sheet should be able to accommodate this (3.1x net debt/EBITDA at the end of FY20E in our model), if trends do not worsen significantly. Pernod has guided for FY20 EBIT (to June) to be down c. 20% on an organic basis, while Remy has guided for FY20 EBIT (to March) to be down 25-30% on an organic basis. We forecast Diageo’s EBIT to be down only 10% on an organic basis in FY20 (to June) as it has less exposure to travel retail and less exposure to the on-trade in some markets (notably the US) than Pernod. The risk is clearly to the downside, however. We believe the period of weakness will be prolonged for Spirits, and could last for several quarters beyond the time when lockdowns are lifted. Inventories will be high, and we anticipate limited demand for high energy social occasions where Spirits over-index. Social distancing may remain a feature of everyday life, as it is in China with limits on how many people can be in an on-trade space at one time. The on-trade will therefore take some time to rebuild to previous levels of sales and profitability. The shift to off-trade has margin implications too, as this channel is lower margin for Spirits companies. Having already anticipated a cut to our numbers, we leave our target price and recommendation unchanged. We target a CY20E PE of 20x for Diageo, which we feel is a more appropriate balance of the risks and rewards than the 25x it is currently trading on.
Multiple markets under pressure Diageo has withdrawn its FY20 guidance entirely, citing uncertainty around the duration and severity of lockdowns across its markets. These lockdowns are impacting consumption in North America (c. 30% of sales), Europe (c. 20% of sales), India (c. 10% of sales), Africa (12% of sales) and many countries in LatAm & Caribbean (9% of sales). The company has cut A&P spending, deferred some capex and is tightly managing working capital. It is also donating 8m bottles of sanitiser to healthcare workers around the world. While there has been some uptick in off trade channels during this time, it is not enough to make up for the significant decline in the on-trade (the latter is stated to be 20% of its US Spirits business sales and 50% of its European sales; in most EMs the on-trade is typically higher). China is recovering very slowly. Balance sheet supports interim dividend, but questions remain Net debt/EBITDA was 2.8x at the end of December 2019. While there are no financial covenants attached to its debt, we doubt the company will want to see this ratio expand significantly. The interim dividend will be paid today, but there is no comment about the final dividend at this point. The share buyback has been paused. Overall, we are left with plenty of questions. How much have sales/profits declined so far since the shutdowns? Wil the FY trend be better or worse than what Pernod has guided to (EBIT -20% organically)? What sort of uptick in off-trade has there been in markets with on-trade closures? Will Diageo update the market before the FY results in late July? If the recovery is slower than expected, is the final dividend safe, and what about next year’s dividend? How flexible is the cost base? How far is the Board willing to stretch the balance sheet? Diageo’s FY results are currently scheduled for 30th July. In the meantime, as we continue to search for answers to these questions, Pernod will report its Q3 on 23rd April.
Diageo: In Depth, Plus500, Ascential, Codemasters, GLI Finance, H
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We are confident that Diageo’s brands and hard to replicate route-to-consumer will survive COVID-19. The forced closure of high margin on-trade outlets and diminished celebratory occasions clearly hurt Diageo’s earnings, but it passes our cash flow stress test.
Pernod now expects FY20 EBIT to decline 20% organically. The magnitude of this decline relative to the company’s history is unprecedented. During 2009, in the immediate aftermath of the financial crisis, EBIT still grew 3.5% organically despite a flat top-line; after the Chinese government clamped down on corrupt activities in 2013, Pernod reported 3 years of flattish organic sales, but EBIT still grew by around 2% in each of those years. We anticipate that Diageo, Pernod’s closest peer, will soon issue another profit warning, too. We believe Diageo could be even more exposed to the on-trade than Pernod (it is more exposed to the US, which has a big on-trade channel, and to Beer, which skews more on-trade than Spirits), and therefore the magnitude of its downgrade could be greater. Longer term, we can understand that investors would like to buy Spirits companies for the superior growth, margins and returns on capital. However, it is unclear how long consumers will be told to stay away from restaurants and bars, and it is also unclear how many outlets will survive the crisis, leaving the on-trade landscape in FY21 uncertain. Consumer behaviour and socialisation patterns may also change going forward. Pernod, and other Consumer companies, will undoubtedly adapt to the new reality (whatever that is), but there may well be a period of adjustment where expectations for the timing of a rebound may be overly optimistic. With the large cap Consumer coverage universe on a CY20E PE of 12.7x, Pernod on 22.4x and Diageo on 18.2x (with further downgrades likely) appear unusually expensive on a relative basis – particularly as Spirits is one of the sectors most affected by coronavirus. The dividend yield of c. 3% is half the average yield across our coverage. There are better bargains elsewhere.
FY20 profit to be c. 4% lower Diageo has this morning released a statement quantifying the expected impact of the coronavirus on its business. FY20 sales are expected to lose £225-325m (c. 2% at the midpoint) and operating profit is expected to lose £140-200m (c. 4% at the midpoint) as a result of the virus. China is a high margin market, hence the disproportionate impact on profits. The majority of consumption in China is in the on-trade channel, which is under significant pressure. Chinese New Year buying was also affected by the virus, which emerged during a key gift giving and celebratory period. Management does not expect the business to pick up until the end of its Q4 (March-June). Mainly an issue in Asia, for now Sales in other parts of Asia are also under pressure. Diageo calls out South Korea, Japan and Thailand as being weak, as well as Global Travel Retail. It is not yet seeing any impact in other markets to which Asian tourists might normally have been travelling, such as Europe, but we consider this to be a possible risk.
DIAGEO - NEUTRAL | 2930p vs. 2970p (-3%) Another warning in the spirits industry Good H1 results… …in difficult conditions Revising downwards our forecasts FV cut to 2,930p
Organic volume growth slowed to flat in H120, from an average rate of growth of 1-2% in recent years. Most of this is due to India, which accounts for about 1/3 of Diageo’s volumes; we expect the market here will improve in due course and return to robust growth. Price/mix +4% remains strong, helped by ongoing premiumisation around the world. Price contributed 1.5% of this with the remaining 2.5% coming from mix. The high end Reserve brands grew organic sales by 11%, implying no slowdown from the FY19 rate. The US is Diageo’s biggest market by far, accounting for about 33% of Diageo’s consolidated sales. The Spirts market here has been resilient and management estimates the entire US Alcohol market – both on trade and off trade – is growing sales by 5.0-5.5%. Management expects to deliver greater productivity savings in H2 which will fund continued growth in marketing spend ahead of sales growth. FX has moved against Diageo and the latest guidance assumes a £110m headwind on sales and a £40m headwind on EBIT (vs tailwinds previously of £375m and £135m, respectively). Our DCF fair value is c.2500p, or 18x CY20E PE. Given the long-term growth prospects for the Spirits category, we doubt the shares will trade much lower than 20x CY20E PE. We do not believe there is significant downside risk from coronavirus, though it may well impact earnings by a low to mid-single digit percentage. At the current level, we think the shares could absorb this. Until the full impact is disclosed, however, we expect the shares to be range bound. We apply a 22x CY20E PE multiple to arrive at the 3,000p target.
Diageo reported H1 results just ahead of peers. However, the lowered FY20 sales guidance and the shy volume growth (+0.2%) have slightly darkened the picture. The strong metrics, still ahead of peers, and the still growing return to shareholders still make it a quality stock for us.
DIAGEO - NEUTRAL | 2970p(-9%) Satisfying results but outlook a bit darker than expected H1 sales slowed down vs 2018/19 – EBIT margin slightly better A number of markets proved to be softer except North America Guidance was revised downwards – both in FX and in organic terms
Diageo posted organic sales growth of 4.2% in line with consensus and organic operating profit growth of 4.6% a touch ahead of consensus at 3.95%. Adjusted EPS of 80.2p missed expectations by 80bps and reported EPS declined YoY by 2.1% due in part to a one-off settlement paid to the French tax authorities.
Interim results in-line, but FY outlook lowered Organic sales are +4%, essentially in-line with consensus for +4.2%. Although the company did not specifically poll for volume and pricing, the organic volume growth of just 0.2% feels a little weaker than one might expect. The operating margin increased 13bps organically (consensus -7bps), helped by price/mix and efficiencies. The underlying EPS of 80.2p is a very slight miss of 0.9% vs consensus 80.9p – but essentially in-line. The FY outlook for mid-single digit organic sales growth is lowered to the “lower end” of the 4-6% range, due to increased volatility in India, LatAm and Caribbean, and Travel Retail. The guidance for organic EBIT growth slightly ahead of organic sales is maintained. We do not expect any meaningful change in consensus (of +5% organic sales growth and +6% organic EBIT growth). North America resilient as LatAm & India deteriorate By region, North America (+6%) performed very well while LatAm & Caribbean (+2%) was weakest. However, margins declined 16bps in North America due to mix. Mexico and the PEBAC regions declined. India was up just 2% as the consumption patterns weakened. China remained resilient (+24%). Canadian whisky (+11%) and Tequila (+31%) were the strongest categories, while Scotch (flat) and Vodka (-1%) underperformed. Conference call details Management will release a pre-recorded presentation at 7:15am UK time on the investor relations website. This will be followed by a live Q&A with analysts at 9:30am UK time; the dial in number is +44 (0)330 027 1446 and the ID code is 2629391.
DIAGEO - NEUTRAL | 2970p vs. 3060p (-4%) Softness expected in H1 2019/20 Organic sales and EBIT growth to be H2-skewed FX guidance to be revised downwards Fair Value cut to 2,970p
1H outturn as expected: Following the 1 August update there are no surprises in today’s detailed interims. Revenue, margins and backlog are as expected. We leave our FY19E P&L forecasts unchanged. Net cash at the period end was $50.2m, with further improvement guided in the 2H19. This is higher than our recently upwardly revised FY19E estimate of $40m. We upgrade again today to $51m and view this as the trough. This cash is worth circa. 12p per share. Wide range for FY20 revenue: No guidance has been given for FY20 revenue and while we expect y-o-y growth, we now take a more prudent view on the revenue build-up. We trim our FY20E revenue by $125m to $490m, which increases our adjusted LBT by $18m to $27m. We trim FY21E revenue by $100m to $690m, but still expect positive adjusted PBT and EPS. The bid pipeline has remained steady at $6.3bn, with the secured backlog at $441m. Inflection point in sight: Despite the recent events in Saudi Arabia, the MENA oil & gas industry continues to move towards the inflection point in investment activity. Lamprell is actively bidding multiple LTA projects and discussions remain on-going about the specification and timing of the two IMI rigs. The in-country exposure in the UAE places Lamprell well for winning more projects as oil & gas activity comes back to life. There is a UAE site visit on 22 October. Renewables: With the EA1 jackets delivered, focus is now 100% on converting the large opportunity pipeline for offshore renewables. Lessons have been learnt, with new people and procedures putting Lamprell in an encouraging position. Banking facilities: Negotiations on a new debt facility continue; with the current facility extended until mid-December 2019, there remains sufficient headroom. Time to look at the OFS sector: The recovery is coming and we believe now is the time to start looking again at opportunities in the sector. With significant capability, Lamprell is well placed to demonstrate its operational leverage.
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On track, margins H2 weighted The company has issued a trading update ahead of the AGM today. Management reiterated the FY guidance issued in late July (of organic sales growth at the middle of the 4-6% medium-term range, and organic EBIT growth c. 100bps ahead of organic sales). However, tough comps mean H1 organic EBIT growth will be flat or below organic sales growth, implying no organic margin expansion and an H2 weighted profit growth profile. Our model already reflects this. We maintain our Sell recommendation, on valuation grounds. US tariffs still a risk The last sentence of the statement reveals that "we would not be immune from significant changes to global trade policy and continue to monitor this closely." The main outstanding issue, we think, is whether the US will place tariffs on Spirits imported from the EU - which would mainly affect Diageo's Scotch sales in the US. We estimate those tariffs could potentially be a drag of a low single digit percentage on group organic sales growth over a FY period, given Diageo’s exposure to the US is high (c. 35% of sales and c. 50% of profit), with Scotch accounting for perhaps 15% of its US sales.
Medium-term guidance is unchanged. Pernod still expects top-line growth of 4-7% and operating leverage of 50-60bps margin expansion p.a. For FY20, in addition to expecting China and India to slow, management has incorporated some assumptions regarding US tariffs on EU spirits. Input cost headwinds remain. FY20 organic EBIT guidance is 5-7%; we forecast +6.7%. No comment on the upcoming Chinese New Year was made on the FY19 call. Although the 21% organic sales growth in FY19 was, in management’s words, “exceptional,” underlying trends in that market remain strong. The Chivas relaunch has been successful and the new premium brands’ route to market is delivering the intended benefits. Our cash flow estimates are revised down as a result of increased investment in capex and ageing inventories, as well as the €1bn share buyback and significant hike in the dividend. We are intrigued by the announcement that Pernod will open the first Chinese single malt whiskey distillery owned by an international spirits company; while the target market initially will be domestic consumers, we expect that in time Pernod will bring Chinese whiskey to other markets and could develop an entirely new category to compete with Japanese, Irish and American whiskies. Investment view. Our DCF fair value is €198, which gives us confidence that the current multiple, while high relative to history, can be sustained. We prefer Pernod over Diageo given better DCF support and greater optionality. Actions taken since Elliott disclosed its stake have been positive for shareholders.
Consumer Staples Weekly, CLS Holdings, Clarkson, Non-Standard Finance, Persimmon, Greene King, Market Highlights
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Last week, we published an update on Kerry Group (HOLD, TP €112.00 from €95). FDA proposes new rule for graphic health warnings on cigarettes. Diageo enters into a JV to distribute Santiago de Cuba rum. L’Oréal to pay $91m to Olaplex in patent infringement case.
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Last week, we published an update on Ontex Group (BUY, €19 from €18.85) - Inflection in sight in 2H’19. Diageo acquires non-alcoholic spirits brand Seedlip. Pernod acquires TX premium whiskies brand. RB partners with Founders Factory to invest in start-ups. Tate issues new debt to refinance 2019 £200m 6.75% notes.
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Big brands recover. The top-line acceleration in FY19 was driven by Scotch (especially Johnnie Walker), US Spirits (especially tequila and Canadian whiskey) and Emerging Market Spirits (especially LatAm and Africa). Smirnoff (+3%) appears to have turned the corner at last. The Global Giants brands in aggregate are growing 5%, an improvement of c. 100bps on the previous growth rate – which is impressive given the size of these brands. The high-end Reserve brands slowed, but Global Giants and Local Stars brands more than offset this. Capital allocation plans revealed. Management announced a 3-year £4.5bn share buyback programme. We assume this is implemented evenly over the period. The net debt/EBITDA target of 2.5-3.0x leaves some room for further bolt-on M&A, which management touched on in the post-results analyst meeting; high-end brands with plenty of growth potential are the priority, with the rum category mentioned as one example. An investment in cannabis is still being considered, but management believes there is no need to rush into the category. Investment view. We raise our target price in acknowledgement of the solid and broad-based delivery in FY19 as well as the modest positive revision to our estimates. Our 3100p target (previously 2950p) is based on a CY20E PE of 22x, and implies a forecast total return of -8.0%. We note our DCF still shows significant (over 25%) downside. The valuation remains extended and well above the historic average. The risk is that EMs could become more volatile and/or the US could impose tariffs on European imported spirits. We maintain our Sell on valuation grounds.
DIAGEO - NEUTRAL | 3060p vs. 2940p (-6%) Growth peaked in 2018/19 Market focused on the top line miss Progress in US spirits and scotch No change to our organic figures Neutral maintained
DIAGEO - NEUTRAL | 2940p(-13%) Less supportive innovations in H2 Deceleration in H2 Details by division Cash generation Outlook
FY’19 sales were broadly in line with organic sales growth of 6.1%, 6 bps lighter than consensus while net sales beat expectations by 60bps. FY’19 organic operating margin expanded 83bps, beating consensus expectations for 75 bps.
Solid FY19 in-line with expectations FY19 organic sales of 6.1% (consensus +6.2%) is essentially in-line. FY organic EBIT growth of +9.0% (consensus +8.7%) is better than expected, and helped by premiumisation, innovation and productivity initiatives. Underlying EPS of 130.8p (consensus 128.8p) was ahead of expectations as the EBIT beat and lower finance costs more than offset a higher tax charge. FCF is in-line at £2.6bn. The Board has approved a multi-year share buyback programme of up to £4.5bn over FY20-22, implying an average of £1.5bn p.a. The medium-term guidance of 5-7% organic EBIT growth is reiterated. FY20 to be at upper end of guidance While the results are strong, consensus is at the high end of the guidance range for FY20 (consensus organic EBIT in FY20 is +6.9%, with the high end at +8.3%). This is appropriate, however, as management is currently guiding for FY20 EBIT to be c. 1% ahead of the medium-term guidance. FX is expected to benefit EBIT by £135m in FY20 – we currently estimate a £7m benefit. Regional performances All regions delivered strong organic sales growth of at least mid-single digits. The important North America region grew organic sales by 5% and Europe and Turkey, the slowest region, still grew organic sales by a respectable 4%. Organic EBIT performance was more mixed, however. North America grew EBIT by 3% and Europe and Turkey grew EBIT by 2%. Africa EBIT grew 50% organically, driven by improved price/mix and productivity on a weak base of comparison. The pre-recorded webcast is available online already, with analyst Q&A scheduled for 9:30 UK time.
The full year was, once again, driven up by emerging markets, as well as the buoyant Gin and Tequila. The new mid-term guidance expects further improvement regarding the operating profit. In parallel, the return to shareholders continues to be one of the group’s priorities, having announced it is to return a further £4.5bn to shareholders over the next three years.
1H’19 organic sales growth of 7.5% beating consensus by 195bps. 1H’19 adj. operating margin expanded 152bps organically, beating consensus expecting 64bps.
Key financials: Net sales were up +5.8% to £6.9bn on a reported basis, +7.5% organically, pushed by all regions. Organic volume grew by 3.5% Reported operating profit reached £2.4bn (+11%), organic operating profit grew by 12.3% Pre-exceptional EPS was 77.0p (+13.6%), while basic EPS was 80.9p, down by 1.6% due to the recent disposals FCF at £1.3bn (+£317m yoy) Interim dividend up by +5% to 26.1p per share Following this strong set of results, the company has approved an incremental share buy-back of £660m, bringing the total programme up to £3.0bn for the year. The group has also confirmed its guidance and continues to expect to deliver mid single-digit organic sales growth and to expand its operating margin by 175bp for the three years ending 30 June 2019.
Diageo sells portfolio on 19 brands to Sazerac for $550m | Nestlé increases stake in Aimmune; relocates Nespresso HQ | Tate & Lyle announces price increases in North America
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Strong set of numbers as the performance in the second half accelerated. The announced share buy-back should please investors.
Higher debt costs on more debt coupled with a higher tax rate could reasonably drive 3% downgrades to consensus EPS. We are seeing management tomorrow morning. In the meantime, we wanted to run through the numbers to see how consensus could evolve. Reiterate SELL.
FY’18 organic sales growth of 5.0% beat consensus by 70bps. FY’18 adj. operating margin expanded 150bps YoY to 31.4%, 30bps ahead of consensus expectations. EPS before exceptional items came in at 118.6, up 9.3% YoY and beating consensus by 2.4%. Growth was also particularly strong in Asia Pac at +9.2%. A new £2.0bn buyback programme for 2019 has been announced. The company reiterated its mid-term guidance of consistent mid-single digit organic net sales growth and 175bps of organic operating margin expansion for the three years ending 30 June 2019 (of which 115bps have already been achieved). FCF was in line yet declined 5.3% YoY.
Diageo launches tender offer to increases stake in SJF | Ingredion to close wet-milling plant on weak sweetener sales | IMB’s NGP subsidiary launches nicotine salt e-liquid brand
Diageo plc Tate & Lyle PLC
The company delivered another period of very solid organic growth in both top line and operating profit. We see business as resilient. Our Add recommendation is maintained.
The group expects a £460m headwind on net sales and £60m on EBIT and would not clarify the adverse FX impact for FY19. Sales in the US exceeded depletions and North America sales appears to be a stretch to meet consensus FY18 expectations. Diageo indicated that they lay down Scotch inventory with an expectation of 2-3% volume growth in the long run. We reiterate our SELL rating.
1H’18 sales came in at £6,530m, missing consensus by 80bps. Organic sales growth of 4.2% beat by 43bps. 1H’18 adj. operating profit of £2,190m missed consensus by 80bps. Underlying profit before tax of £2,204m missed consensus by 3.3%. EPS before exceptional items rose 9.4% to 67.8p, beating by 3.5%. Organic sales growth in North America remains lacklustre at 2.5% with vodka continuing to weigh on growth despite an 8% increase in marketing while Canada also slowed. Diageo sees a £460m hit to sales and £60m to operating profit from adverse FX for FY'18. The company lowered their FY’18 tax rate guidance to 20% from 21% post U.S. tax law changes.
Diageo’s (DGE LN, HOLD, T/P 2700p) brunchtime conference call with Sam Fischer, President of Diageo Greater China and Asia yesterday was interesting. The region – Diageo’s third largest at 20% of net revenue – should deliver the fastest pace of organic growth for the group in the next 2 years. The call confirmed our expectations of brisk sales growth and pointed further margin expansion for the region. We roll over our price target from calendar 2017 2018 and increased it from 2250p to 2700p.
FY preliminary results: volumes were up +1.1% (cons. 1.6%). Sales grew organically by +4.3% (cons. +4.2%, H2: +4.2%). On reported figures, sales were up +15% helped by FX tailwinds. FY organic net sales by region: North America 3% (cons. 3%, H2: +3%), Europe 5% (cons. 4.5%, H2: +5%), Africa 5% (cons. 5%, H2: +6%), LatAm 9% (cons. 10.9%, H2: +7%), and Asia Pacific 3% (cons. 2.6%, H2: +3% ). The operating margin before exceptional items was up 244bp on reported figures (cons. +130bp) and 37bp on an organic basis. The group maintains its FY17-19 guidance of mid single-digit top-line growth whereas the operating margin expansion should achieve 175bp (100bp previously) over the three years ending 30 June 2019. The productivity savings target is £700m (up from £500m), of which 2/3rds will be reinvested into the business. The company also announced a £1.5bn share buy-back programme in FY18.
Diageo (DGE LN, HOLD, T/P 2250p) announced FY2017 revenue of £12.1bn, which was a touch above Bloomberg consensus £12.0bn but bang in line our own view. Organic sales grew 1.1% and like for like operating profit rose 5.6%, ahead of top line growth. This was driven partly by productivity gains. Diluted adjusted EPS was 105p (FY2016: 89p), in line with both Whitman Howard and consensus.
The Scottish government, an administration which has no powers to raise duty but has powers to manage the region's NHS on an independent basis has implemented Minimum Unit Pricing for alcoholic drinks. Unusually high per capita consumption of alcohol in Scotland was responsible initially for the move towards minimum pricing. Importantly, a minimum price is being set for alcohol in its own right rather than for an alcoholic drinks category.
Diageo (DGE LN, HOLD, T/P 2250p) hosted a “brunch time call with the presidents” yesterday for Alberto Gavazzi, Diageo’s Latin America & Caribbean President. The region shrank in the last two fiscal years. However, organic net sales grew 11% at interim stage. The call focused on the opportunity in LAC, updates on current trading, progress in route to consumer, productivity and regional progress.
Diageo (DGE LN, HOLD, T/P 2250p) hosted its 18 monthly Capital Markets Day on 9 th May, in London. Presenters included Ivan Menezes (CEO), Kathy Mikells (CFO) and John Kennedy, President of Europe, Russia, Turkey and India.
Diageo (DGE LN, HOLD, T/P 2250p) yesterday afternoon hosted its latest regional Brunch-time Call with the Presidents yesterday. John O’Keeffe used the call to focus on Africa, with the key message that despite short term turbulence, Diageo’s mid to long term guidance remains intact.
Diageo (DGE LN, HOLD, T/P 2250p) this morning reported FY2017 H1 interim results, which were ahead of expectations at both sales and earnings level. Moreover, the company reiterated its commitment to mid-single digit top line growth and 100 basis points of margin expansion in the next three years.
H1 update: organic volumes were up +1.8% (cons. +2%) whereas net sales grew organically +4.4% (cons. 3.1%, AV +4.1%) with the price/mix at +2.7%. On a reported basis, net sales were up +15% (FX: 15.2%). Organic net sales by region: North America +3% (cons. +3.2%), Europe +5% (cons. +3.1%), Africa +4% (cons. +4%), LatAm +11% (cons. +2%), and Asia Pacific +3% (cons. +3.5%). Organic volume growth by region: North America +1%, Europe +3%, Africa +3%, LatAm +0%, Asia Pacific +2%. The operating margin for the period was up 150bp on reported basis (to 32.6% vs. cons. 31.4%) and flat organically. The profit attributable to shareholders is up +8% to $1,514m. The interim dividend is 23.7p (+5% yoy). The group maintains its guidance of mid single-digit top-line growth and a 100bp improvement in the organic operating margin in the three years ending 30 June FY19.
Diageo released its preliminary FY results. Volumes were up 1.3% (cons. 1.5%, vs. 1% in H1). Sales grew organically by 2.8% (cons. +2.7%) with a better H2 (3.8%). Organic net sales by region in H2: North America +7.7%, Europe +4.2%, Africa +3.1%, LatAm -7%, and Asia Pacific +1.6%. On reported figures, sales were down 3% due to adverse FX (especially the Nigerian naira, the South African rand, the Venezuelan bolivar, the Brazilian real and the Turkish lira). The operating margin before exceptional items was up +30bp on reported figures and 19bp on an organic basis. The group expects to deliver a stronger performance in FY17, aiming on average mid single-digit top-line growth in the next three years.
H1 results. The organic volumes were up by 1% (cons +0.6%). The organic net sales progressed 1.8% (cons +1.6%). Price/mix stood at 0.8%. Organic net sales by region: NorAm -2% (cons -2%), Europe +3% (cons +1%), Africa +3% (cons +6.5%), LatAm +9% (cons 5%), Asia Pacific +2% (cons +3%). Organic volume growth by region: NorAm -2% , Europe +2%, Africa +7%, LatAm +4%, Asia Pacific +0%. On the reported figures, net sales were down by -5% due to negative FX and some disposals in the wine category. The operating margin progressed organically by 16bps and, on the reported figures, was down by 54 bps due to FX headwinds, to 30.6%. The profit attributable to shareholders grew by 7% to $1,406m due to exceptional items linked to disposals. The proposed interim dividend stood at 22.6 pence (in line with consensus).
Diageo reported its FY results. Net sales stood at £10.8bn (in line with consensus), which translates into +5.4% yoy on a reported basis. On an organic basis, the revenue was flat (0.3% in Q4). The FX impact stood at -3.3% whereas acquisitions and disposals added 8.7% (USL fully consolidated).
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