Summary

  • Diageo is a global leader in beverage alcohol with an outstanding collection of brands across spirits and beer.
  • Diageo has an outstanding collection of over 200 brands enjoyed in more than 180 countries
  • The company own Johnnie Walker and Smirnoff, two of the world’s four largest international spirits brands by retail sales value
  • Diageo Recently completed acquisition of Casa UM

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Company Overview

Diageo (LSE:DGE, OTC:DGEAF) is global leader in beverage alcohol with an outstanding collection of brands across spirits and beer. The company produce an outstanding collection of over 200 brands – old and new, large and small, global and local – that are enjoyed in more than 180 countries around the world.1

Diageo was created in 1997 but its business is built on the principles and foundations laid years before by giants of the industry – Arthur Guinness, John Walker, Elizabeth Cumming and many more. Today, the company stand on the shoulders of these giants and, inspired by their ideas, philosophy and audacity, act with the same entrepreneurial spirit and determination.

Diageo has 27,650 talented people working together to grow its business and nurture its brands. Diageo is committed to their professional and personal development, and ensuring that Diageo is a great place to work.

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Brands

Diageo has an outstanding collection of over 200 brands enjoyed in more than 180 countries. The company's brands are crafted, authentic, relevant, luxury, with something for every taste and celebration, big or small. Old and new, global and local the breadth of its portfolio is second to none.

The company own Johnnie Walker and Smirnoff, two of the world’s four largest international spirits brands by retail sales value

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Diageo's brand portfolio includes:

Scotch whiskyBlack & White, Buchanan’s, J&B, Johnnie Walker, Grand Old Parr, Lagavulin, The Singleton, Talisker and Windsor.
Other whisk(e)yBulleit and Crown Royal.
VodkaCîroc, Ketel One and Smirnoff.
RumBundaberg, Captain Morgan, Ron Zacapa.
LiqueurBaileys.
TequilaCasamigos and Don Julio.
GinGordon's and Tanqueray.
Local spiritsMcDowell’s, Shui Jing Fang, Yeni Raki and Ypióca.
BeerGuinness.

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Financial Overview

The company's business has seen strong recovery in top line performance from the impact of the Covid-19 pandemic with net sales above pre-Covid fiscal 19 levels, driven by its quick pivot to changes in consumer occasions and behaviours. As a result, in fiscal 21 organic net sales were up 16%, with all regions growing above prior year levels. The company's marketing investment grew ahead of sales as the company up weighted investment in the markets and categories with positive growth momentum and quickly responded to channel shifts and the increase in at-home occasions.2

“Operating margin expanded 46bps primarily driven by overhead efficiencies and lapping one-off expenses in the prior year. The company generated £3.0 billion in free cash flow through disciplined actions, further strengthening Diageo’s liquidity position to ensure its ability to continue to invest for long term sustainable growth. While the environment remains volatile, its strategy, which remains relevant, combined with its agile and high-performance culture, give me confidence that Diageo is well-positioned to drive growth and continue to create value for all of its stakeholders.”

Lavanya Chandrashekar Chief Financial Officer

North America

North America remains the second largest beverage alcohol market worldwide1 and represents over one-third of its net sales.

With nine domestic production facilities across the United States, Canada and the US Virgin Islands, Diageo North America’s supply function is one of the largest producers of beverage alcohol on the continent. Diageo has made major investments in innovation and sustainability driving efficiency and best in class operations. To support the growth in its ready to drink portfolio, the manufacturing footprint is being expanded with the creation of a new RTD facility in Plainfield with capacity to produce over 25 million cases. The facility is due to be completed in summer 2021.

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Europe and Turkey

Across its Europe business Diageo has brought its consumer marketing programmes closer to its consumers and customers as Diageo has embedded its new operating model in F21. The company continue to optimise its route to market and execute its strategy of growth through international premium spirits and beer through premiumisation.

A number of Diageo’s International Supply Chain and Procurement operations are located in Europe including production sites in the United Kingdom, Ireland and Italy. The group owns 30 distilleries in Scotland, a Dublin based brewery, distillery, and maturation and packaging facilities in Scotland, England, Ireland and Italy. The team leads all supply chain activities for Europe and manufactures whisky, vodka, gin, rum, beer, cream liqueurs, and other spirit-based drinks which are distributed in over 180 countries.

The company is currently investing £185million in Scotch whisky and tourism in Scotland to create a major new Johnnie Walker global brand attraction in Edinburgh (Johnnie Walker Princes Street), to transform its distillery visitor experiences and to bring the iconic lost distilleries of Brora and Port Ellen back into production. The distillery visitor investment will focus on the ‘Four Corners distilleries’, Glenkinchie, Caol Ila, Clynelish and Cardhu, celebrating the important role these single malts play in the flavours of Johnnie Walker. Construction of Johnnie Walker Princes Street in Edinburgh will be completed later this year and Diageo has already opened the new visitor experiences at Glenkinchie, Clynelish and Cardhu to the public. The revived Brora Distillery also began production in May 2021.

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Africa

In Africa its strategy is to grow through selective participation in beer, near beer and spirits, leveraging the broad range of the Diageo Portfolio. Guinness, Malta Guinness and several local brands including Tusker and Serengeti lead its brewing portfolio while Johnnie Walker and Smirnoff are at the heart of its international premium spirits offerings. Locally the company produce a range of mainstream spirits at the mid-level price range and tailored to local tastes and flavours. The company's operating model builds resilience into its African businesses and the company drive smart investments through local manufacturing, innovation and partnerships to unlock growth. Local sourcing is very important to its strategy, currently at 80%, directly supporting its commercial operations whilst bringing wider economic benefits to local communities, agricultural development and farmers.

Diageo has 13 breweries in Africa and ten facilities which provide blending, malting and bottling services. In addition, its beer and mainstream spirits brands are produced under licence by third parties in 14 African countries and the company distribute beer and spirits through several third party relationships across the region.

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Latin America and Caribbean

In Latin America and Caribbean its strategic priority is to continue to lead with scotch, while broadening its category range through tequila, gins, vodka, rum, liqueurs and local spirits. As the industry leaders in spirits, the company continue to strategically expand its reach and the breadth and depth of its portfolio of leading brands. Simultaneously, Diageo is enhancing its supply structure enabling the business to widen its price points, providing both the emerging middle class, and an increasing number of affluent consumers with the premium brands they aspire to buy. The company's presence is strengthened by its stance on responsible drinking and community development programmes.

Many of the brands sold in the region are manufactured by its International Supply Centre in Europe, but the company also own manufacturing facilities in Mexico that produce tequila, in Brazil to produce cachaça and vodka, and in Guatemala that produce Zacapa rum. The company also work with a wide array of local co-packers, bottlers, and licensed brewers throughout Latin America and the Caribbean.

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Asia Pacific

In Asia Pacific its focus is to grow in both developed and emerging markets across its entire portfolio ranging from international and local spirits to ready to drink formats and beer. Diageo has a clear long-term strategy that enables it to allocate resources behind brands that win in key consumer occasions and categories. The company manage its portfolio to meet the increasing demands of the growing middle class and aim to inspire its consumers to drink better, not more. This strategy ensures that the company deliver consistent and efficient growth with a key focus on developing its premium and super deluxe segments across the region.

Diageo has distilleries in Chengdu, China that produce Baijiu and in Bundaberg, Australia that produce Bundaberg Rum. The company's manufacturing plant in Bali produces the highest quality spirits for the Indonesian market. United Spirits Limited (USL) in India operates 15 manufacturing sites across the country. In addition, USL and Diageo brands are also produced under licence by third party manufacturers. Diageo has bottling plants in Thailand and Australia with ready to drink manufacturing capabilities.

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Fiscal 21 Results

Results for the year ended 30 June 20213

  • Reported net sales (£12.7 billion) increased 8.3%, with strong organic growth, partially offset by an adverse foreign exchange impact.
  • Organic net sales growth of 16.0%, driven by growth across all regions and a benefit from lapping a reduction of inventory levels by its customers in fiscal 20.
  • North America organic growth of 20.2%, reflecting resilient consumer demand, spirits taking share of total beverage alcohol and the replenishment of stock levels by distributors and retailers.
  • Reported operating profit (£3.7 billion) increased 74.6%, and reported operating margin increased by 1,112bps, primarily due to a significant reduction in exceptional operating items.
  • Organic operating profit growth of 17.7%, following decline in fiscal 20, with growth in all regions except Europe and Turkey.
  • Organic operating margin increased 46bps, driven by overhead efficiencies and lapping one-off expenses, partially offset by gross margin decline and upweighted marketing spend.
  • Basic eps increased 89.4% from 60.1 pence to 113.8 pence Basic eps before exceptional items increased 7.4% from 109.4 pence to 117.5 pence

2022 Interim Results, half year ended 31 December 2021 4

  • Reported net sales of £8.0 billion increased 15.8%, with strong organic growth, partially offset by an adverse foreign exchange impact.
  • Organic net sales grew 20.0%, driven by strong double-digit growth across all regions, supported by effective marketing and excellent commercial execution.
  • Growth reflects continued recovery in the on-trade, resilient consumer demand in the off-trade and market share gains, and was underpinned by favourable industry trends of spirits taking share of total beverage alcohol and premiumization.
  • Reported operating profit of £2.7 billion increased 22.5%, and reported operating margin increased 190bps, primarily due to growth in organic operating profit.
  • Organic operating profit grew 24.7%, with growth across all regions.
  • Organic operating margin increased 131bps, primarily driven by a strong recovery in gross margin and leverage on operating costs, while increasing marketing investment.
  • Supply productivity savings and price increases more than offset the impact of cost inflation.
  • Net cash flow from operating activities decreased £0.1 billion to £1.9 billion, and free cash flow decreased £0.2 billion to £1.6 billion, primarily due to lapping an exceptionally strong working capital benefit in the first half of fiscal 21.
  • Strong balance sheet, with leverage ratio(iii) of 2.5x at 31 December 2021, at the low end of its target range.
  • Increased basic eps by 24.7% to 84.3 pence and pre-exceptional eps by 22.5% to 85.6 pence.
  • Increased interim dividend by 5% to 29.36 pence per share.
  • Completed £0.5 billion of share buybacks as part of return of capital programme of up to £4.5 billion.
  • Accelerating timeline to complete return of capital programme during fiscal 23.

Recent developments

Diageo completes acquisition of Casa UM5

28 JAN 2022;Diageo today announces that it has completed the acquisition of Casa UM, owner of premium artisanal mezcal brand, Mezcal Unión, as announced on 10 August 2021.

Diageo agrees to sell Meta Abo Brewery, Ethiopia6

24 JAN 2022; Diageo has entered into an agreement for the sale of Meta Abo Brewery, its brewery in Sebeta, Ethiopia, to BGI, part of Castel Group. The sale is subject to approval by the Ethiopian Competition Commission and certain conditions. It is expected that the deal will complete early in 2022.

Diageo will continue to service the Ethiopian market with its international spirits portfolio through its dedicated imported spirits channel. Sale proceeds have not been disclosed.

References

  1. ^ https://www.diageo.com/en/our-business/who-we-are/
  2. ^ https://www.diageo.com/PR1346/aws/media/13214/diageo-annual-report-2021.pdf
  3. ^ https://www.diageo.com/en/news-and-media/press-releases/2021-preliminary-results-year-ended-30-june-2021/
  4. ^ https://www.diageo.com/en/news-and-media/press-releases/2022-interim-results-half-year-ended-31-december-2021/
  5. ^ https://www.diageo.com/en/news-and-media/press-releases/diageo-completes-acquisition-of-casa-um/
  6. ^ https://www.diageo.com/en/news-and-media/press-releases/diageo-agrees-to-sell-meta-abo-brewery-ethiopia/
Created by Asif Farooqui on 2022/02/16 18:24
     

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