Diageo reported full-year net sales of $20.3bn, down 0.6% organically. Price hikes of 2.9% were more than offset by a 3.5% decline in volumes, mainly driven by weakness in its Latin America and Caribbean (LAC) region.
Underlying operating profit came in 4.8% lower at $6.0bn due to the decline in revenue and increased investments in digital and marketing capabilities.
Free cash flow improved by $0.4bn to $2.6bn, thanks to careful inventory management. Net debt rose from $19.6bn to $21.0bn.
The full-year outlook was uncertain, with Diageo saying that “when the consumer environment improves, organic net sales growth will return.” Markets are currently forecasting full-year organic sales growth of 3.5%.
A full-year dividend of 103.48 cents per share has been announced, up 5%.
The shares fell 7.8% following the announcement.
Our view
Diageo’s full-year results saw both revenue and operating profits head in the wrong direction. Volumes across most regions were weaker, which was largely to be expected given the tough consumer environment. But it’s a huge drop-off in the Latin America and Caribbean (LAC) region which is causing most of the pain.
Against a tough comparable period, sales in LAC dropped by a staggering 15% as customers here have been consuming less and trading down to cheaper alternatives. Given that LAC is one of its higher-margin territories, the drop had an exaggerated impact on profits.
The near-term outlook in LAC remains murky, so Diageo’s stopped short of issuing full-year guidance at the group level this time round. Regardless, markets are forecasting organic sales growth of 3.5% this year, but that’ll require swift improvements in the key LAC region.
Trading across most of the group's other main regions has remained positive. Diageo's been leaning on its brand power to help push through price hikes, with only a small drop in volumes. That’s testament to the impressive catalogue of brands like Guinness, Tanqueray, Don Julio tequila and many more.
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.
Diageo's focus is to premiumise its portfolio, offloading a selection of smaller brands to shift the dial towards sales of more lucrative products. That's served the group well in the past, as consumers willing to spend money on premium brands have tended to be more resilient to cost-of-living pressures. But with volumes beginning to stutter, we're seeing the rate of price hikes easing.
The group's inventory levels are being right-sized after the group built them up to avoid future supply chain disruptions. That's boosting free cash flow in the short-term, and helping to fund shareholder returns. As always, there are no guarantees.
Improvements in the LAC market will be key to future margin expansion but to a large extent, the timing of that is outside of Diageo's control. We see the group as fundamentally strong, with a world-class stable of brands to fall back on. The current valuation is well below its long-run average and looks appealing to us. But investors will need patience to ride out the uncertainty and there are no guarantees.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Diageo’s management of ESG risk is strong.
The group aims to achieve net zero emissions by 2050, or sooner, with Scope 1,2 & 3 emissions targets in place. Diageo has set water reduction targets and deadlines, however, it does not disclose its initiatives to achieve this and there is no external certification for its environmental management activities.
Diageo key facts
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