Multiple markets under pressure Diageo has withdrawn its FY20 guidance entirely, citing uncertainty around the duration and severity of lockdowns across its markets.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.