Diageo profits plunge 47% as pandemic hits global demand

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Diageo today admitted profits for the past year plunged 47% hit by the closure of the on-trade activities and the cancellation of sports events around the world.

Diageo revealed in results for the year ending 30 June 2020 that the reported net sales (£11.8 billion) were down 8.7% driven by organic declines. Reported operating profit (£2.1 billion) declined 47.1%, driven mainly by exceptional operating items and organic net sales.

Organic net sales for Diageo were down 8.4%, with growth in North America more than offset by declines in all other regions. Organic volumes were down 11.2%.

Diageo’s Organic operating profit was down 14.4%, ahead of organic net sales, driven by volume declines, cost inflation and unabsorbed fixed costs that were partially offset by short term cost reductions and ongoing productivity benefits.

Solid cash flow delivery with net cash from operating activities at £2.3 billion, £0.9 billion lower than a prior period and free cash flow at £1.6 billion, £1.0 billion lower than the prior period, in each case largely due to lower organic operating profit, lower dividends from associates, one-off tax impacts and increased working capital use.

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Measures have been put in place to reinforce Diageo’s already solid liquidity including pausing the current three-year return of the capital programme, bringing forward a £2.0bn USD bond issuance launched in April 2020 and putting in place an additional committed credit facility of £2.5 billion.

Exceptional operating items included non-cash impairment charges of £1.3 billion. These were in India, Nigeria, Ethiopia and on the Windsor brand in Korea, reflecting the impact of Covid-19 and challenging trading conditions.

Basic eps of 60.1 pence decreased by 54.0% primarily due to exceptional operating items. Pre-exceptional eps declined 16.4% to 109.4 pence, driven primarily by lower operating profit.

The final recommended dividend of 42.47 pence per share is the same as the final dividend for fiscal 19. This brings the full-year dividend for fiscal 20 to 69.88 pence per share, an increase of 2%.

Africa

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Africa net sales declined by 13%. Growth in the first half was offset by the impact of Covid-19 in the second half.

East Africa declined 10% where continued beer growth in Tanzania was offset by lockdown closures affecting the on-trade in Kenya and Uganda. Net sales in Nigeria declined 20%, driven by double-digit declines in beer and scotch.

Diageo profits plunge 47% as pandemic hits global demand

In South Africa, Diageo’s net sales declined 25%, driven by scotch and vodka, as a result of both on-trade and off-trade closures and a troubled economic climate. Africa Regional Markets declined 8%, as strong beer growth in Ghana was offset by on-trade closures and the impact of significant excise increases in Ethiopia.

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Beer declined 13% as the growth of Serengeti was offset by other key beer brands, including Guinness, Tusker and Senator, mainly due to on-trade closures. Spirits declined 14%, mainly impacting Johnnie Walker, Kenya Cane and Smirnoff.

Operating margin declined 877bps, driven mainly by volume losses that caused lower fixed cost absorption and excise duty increases. These were partially offset by marketing to spend savings and improved overhead management.

NIGERIA

In Nigeria, net sales declined by 20%. First-half growth was offset by volume impacts from Covid-19 restrictions as it exacerbated an already challenging economic climate; while VAT and spirits excise increases also impacted consumer demand in a competitive environment.

The robust performance of Orijin Bitters, successful spirits innovations, and increased at-home consumption, were offset by declines in beer. Malta Guinness and Guinness were impacted by on-trade closures.

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Increased focus on the off-trade and e-commerce channels, through the introduction of trade telesales and consumer platforms together with an online store, reduced some impacts of lockdown.

Marketing investment declined by 8%. We rapidly reacted to consumer shifts in the second half, through telesales, pack reprioritisation and the redeployment of investment to e-commerce and the off-trade.

Ivan Menezes, Chief Executive, Diageo, commenting on the results said:

“Fiscal 20 was a year of two halves: after a good, consistent performance in the first half of fiscal 20, the outbreak of Covid-19 presented significant challenges for our business, impacting the full-year performance. Through these challenging times, we have acted quickly to protect our people and our business, and to support our customers, partners and communities.

The actions we have taken to strengthen Diageo over the last six years provide a solid foundation to respond to the impacts of the pandemic. We are now a more agile, efficient and effective business.

We have taken decisive action through the second half of fiscal 20, tightly managing our costs, reducing discretionary expenditure and reallocating resources across the group. We are further enhancing our data analytics and technology tools to rapidly respond to local consumer and customer shifts triggered by the pandemic. We have strengthened liquidity, giving us the flexibility to continue to invest effectively in the business for the long term.

While the trajectory of the recovery is uncertain, with volatility expected to continue into fiscal 21, I am confident in our strategy, the resilience of our business and am very proud of the way our people have responded. We are well-positioned to emerge stronger.”

Diageo profits plunge 47% as pandemic hits global demand

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