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...
