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Diageo plc DEO reported interim results for the first half of fiscal 2021, ended Dec 31, 2020, wherein pre-exceptional earnings per share declined 12.8% year over year to 69.9 pence (in local currency). This was backed by a decline in operating profits and unfavorable currency rates. However, the company noted that sales and operating margin reflected gains from the second half of fiscal 2020.
Although it did not provide specific guidance citing the continuation of uncertainty, it expects improvements across all regions from the second half of fiscal 2020. The company expects the momentum in North America to continue, while the pace of recovery in other regions will be more closely associated with the reopening of the on-trade channel and the level of restrictions applied. Additionally, it expects the Travel Retail business to be largely impacted due to lesser travelers.
The company predicts organic operating margin in the second half of fiscal 2021 to be ahead of organic net sales across all regions, except for North America, due to weak comparable period. Notably, North America witnessed organic operating margin growth in the second half of fiscal 2020. Moreover, organic operating margin in the second half will likely be pressured by channel and product mix due to the impacts on Travel Retail and restrictions on on-trade.
Diageo’s stock rose 4.7% yesterday probably due to the optimistic outlook for the second half and sequential gains witnessed in the first half of fiscal 2021.
Shares of the Zacks Rank #3 (Hold) company have gained 24.1% in the past three months compared with the industry’s growth of 21.1%.
1H FY21 Highlights
On a reported basis, net sales and operating profit declined 4.5% and 8.3%, respectively, owing to unfavorable exchange rates. Organic net sales were up 1%, while organic operating profit declined 3.4% year over year. Organic volume was down 0.2% as volume growth in North America and Latin America were more than offset by declines in other regions. However, price/mix grew 1.2%.
Organic sales returned to growth in the first half of fiscal 2021, driven by efforts to quickly respond to increased demand in the off-trade channel and changes in consumer occasions, as well as investments in new opportunities. Further, growth was aided by fast recovery in certain markets, particularly North America and Greater China. However, organic sales were significantly impacted by declines in Travel Retail and on-trade restrictions.
In North America, which is the company’s largest market, sales accelerated 12.3%, which offset the decline in other regions, except for Africa that reported flat revenues. Sales growth in North America was backed by strong consumer demand, market share growth in the spirits category, positive category mix, and uninterrupted stock replenishments by distributors and retailers.
Meanwhile, sales across all other regions reflected marked improvement from the second half of fiscal 2020. The sequential gains were mainly driven by improved market share on excellent off-trade channel execution and partial reopening of the on-trade channel in some markets.
Organic operating profit was marred by adverse channel and category mix. Notably, everyday cost efficiencies led to productivity gains, which mostly offset the cost of goods sold inflation. In the first half of fiscal 2021, organic operating margin declined 153 basis points (bps). On a sequential basis, organic operating margin improved, driven by higher operating leverage and tight management of discretionary expenditure.
In the first half of fiscal 2021, Diageo delivered net cash from operating activities of £2 billion, marking an increase of £0.7 billion year over year. Furthermore, the company reported strong free cash flow of £1.8 million, up £0.8 billion from the last year due to lower tax payments and working capital benefits, driven by reduced creditor balances at the end of fiscal 2020.
Diageo remains committed to its disciplined approach to capital allocation primarily to enhance shareholder value. The company increased the interim dividend by 2% from the fiscal 2020 dividend rate. This reflects its strong liquidity position and confidence in the long-term health of its business.
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