Diageo saw half-year sales increase 18.4% to £9.4bn, with growth across all regions and the benefit of favourable exchange rates. Excluding currency impacts, organic sales grew 9.4%, consisting of 1.8% volume growth and 7.6% from higher average prices.
Underlying operating profit grew 9.7% to £3bn, helped by price increases and productivity savings which more than offset the impact of cost inflation.
Free cash flow declined by £758m to £817m as the group paid cash to creditors and increased spending on inventory.
The group expects to deliver on medium-term guidance of "consistent" organic net sales growth in the range of 5% to 7%, and organic operating profit growth in the range of 6% to 9%, between the current financial year and 2025.
The shares fell 6.4% following the announcement.
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Our view
Double-digit revenue growth gave Diageo the confidence to reaffirm its medium-term guidance for the next few years.
The main driver behind the revenue jump is higher selling prices. The group's leaning on its brand power, and so far it's managed to hike prices without hurting volumes - testament to the impressive catalogue of brands ranging from Guinness to Don Julio tequila.
Whisky is also in the portfolio and is an especially attractive market because it takes a lot of up-front investment and time for a newcomer to compete. Good whisky needs to be aged, so a new competitor would need to be comfortable waiting for their investment to pay off. Alternatively, they could buy existing distilleries and spend heavily on marketing, but scaling up would be difficult and expensive. Strong brands and barriers to entry have meant attractive margins in normal times.
A growing middle class in emerging markets is also playing into the group's hands. It has attractive positions in the key Chinese and Indian markets, and as consumers move up the value chain, Diageo is waiting for them with Black, Blue and Double Black labels.
Diageo's current focus is to premiumise its portfolio, offloading a selection of smaller brands to shift the dial towards sales of more lucrative products. For now, that looks to be the right move as consumers willing to spend money on premium brands tend to be more resilient to cost of living pressures.
But investors shouldn't be holding their breath for more sets of double-digit growth. Sales aren't expected to stay at these levels for long, with organic net sales growth expected to dip down to mid-single digits over the next couple years.
Looking to the balance sheet, inventory levels have climbed as the group aims to avoid future supply chain disruptions. This has significantly dented free cash flow, as did payments to creditors after higher-than-normal lines of credit last year.
With a world class stable of brands and exposure to emerging markets, the group appears to be in an enviable spot. But keep in mind, its valuation means there's pressure to deliver and the current economic environment adds some extra risk.
Diageo key facts
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