Encouraging signs for Diageo in half-year results

01 February, 2021 by Andy Young

Diageo has delivered its results for the first-half of its financial year and while the operating environment remains challenging, the drinks giant says it is encouraged by its performance.

Diageo said that thanks to its rapid pivoting and an “extremely resilient” off-trade channel Australia saw organic volume increase by 25 per cent, organic sales grow by 23 per cent and reported net sales up 26 per cent.

Advertisement

CEO Ivan Menezes said: “We delivered a strong performance in a challenging operating environment, returning to top line organic sales growth during the half. We rapidly pivoted to the channels and occasions most relevant to consumers and invested behind new opportunities. This more than offset the impact of on-trade restrictions and the decline in Travel Retail.

“North America, our largest market, performed particularly strongly and ahead of our expectations. Consumer demand has been resilient and the spirits category continues to gain share of total beverage alcohol. Across other regions we delivered strong sequential improvement compared to the second half of fiscal 20.

“This reflects improved market share performance through excellent execution in the off-trade channel, and the partial re-opening of the on-trade channel in certain markets.”

Overall Diageo’s reported net sales for the first half were £6.9 billion down 4.5 per cent, with organic growth of 1.0 per cent more than offset by unfavourable exchange. Reported operating profit of £2.2 billion declined 8.3 per cent, which Diageo said was

The company also reported a drop in organic operating profit, down 3.4 per cent, which driven by channel and category mix. Diageo also said productivity benefits from everyday cost efficiencies largely offset cost of goods sold inflation.

Additionally net cash from operating activities was up £0.7 billion to £2.0 billion, and free cash flow up £0.8 billion to £1.8 billion.

Diageo said this primarily reflects a lower tax payment and working capital benefit driven by reduced creditor balances at the end of fiscal 20, as a result of reduced sales demand and cost control measures triggered in response to Covid-19. Creditor balances have now recovered to more normalised levels.

Menezes added: “Organic operating margin improved compared to the second half of fiscal 20 driven by increased operating leverage and tight control of discretionary expenditure. The decline compared to the first half of fiscal 20 reflected an adverse channel and portfolio mix. We expect margins to improve as the on-trade and Travel Retail recover and with the continued benefit of everyday efficiency.

“Our proprietary tools and data-led insights are enabling us to invest smartly in effective marketing and innovation. We continue to strengthen brand equity, premiumise our portfolio and expand our digital capabilities.

“I am proud of the creativity and adaptability of our people and their exemplary commitment to supporting our customers and communities. Our $100 million global commitment to support the recovery of the hospitality sector has already reached around 30,000 outlets in seven countries.”

Looking ahead he said: “We expect ongoing volatility and disruption in the second half of the year, particularly in the on-trade channel, which will make performance more challenging. The medium and long-term growth drivers and opportunities for our business remain intact and I am confident in our strategy, the resilience of our business and Diageo’s ability to emerge stronger.”