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Diageo - volumes stumble, medium-term guidance reiterated

Diageo's full-year net sales grew by 6.5% to £17.1bn, on an organic basis. This was driven by 7.3% higher average selling prices which more than...

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Diageo's full-year net sales grew by 6.5% to £17.1bn, on an organic basis. This was driven by 7.3% higher average selling prices which more than offset a small decline in volumes of 0.8%.

Underling operating profit grew 7.0% to £4.6bn, driven by higher net sales and growth in all regions except North America.

Free cash flow fell by £1.0bn to £1.8bn, largely due to higher inventory levels as the group looks to avoid future supply chain disruptions. Net debt rose from £13.7bn to £15.1bn.

Organic net sales and operating profit are expected to grow this year, weighted towards the second half. Over the medium term, Diageo expects to deliver "consistent" net sales and operating profit growth in the 5-7% and 6-9% ranges respectively.

The group announced a final dividend of 49.17p per share, up 5%.

The shares fell 1.6% following the announcement.

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Our view

Diageo's recently minted CEO, Debra Crew, had big boots to fill following on from the late Sir Ivan Menezes. The first set of results issued under Debra's command showed that the group plans to keep leaning on its brand power to help push through price hikes.

So far, the 7.3% higher average prices have only led to a small drop in volumes - 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.

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. 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 could potentially see the rate of price hikes eased this year.

It was pleasing to see sales grow in four out of five regions last year, despite lapping tough comparative periods where sales had grown by double-digit percentages. From here, sales and profit growth's expected to run at mid-to-high single digits over the next couple of years. With a world-class stable of brands and exposure to emerging markets, we don't think this looks like a demanding target.

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

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 1st August 2023