Morning Note: Market news and an update from Diageo.

Market News

US equity markets moved high last night driven by tech: S&P 500 (+0.8% to another all-time high), Nasdaq (+1.1%). Tech giants Microsoft and Alphabet (Google) report today post-market, as do Pfizer, MSCI, UPS, GM, and Starbucks.

This morning in Asia, equities were generally weak as optimism about a potential government rescue in China faded: Nikkei 225 (+0.1%); Hang Seng (-2.4%); Shanghai Composite (-1.8%). China’s 10-year yield fell to a two-decade low on rate cut hopes.

The FTSE 100 is currently trading 0.5% higher at 7,668. Kantar data showed that UK grocery inflation fell slightly in January to 6.8%. BRC reported that shop price inflation fell sharply to 2.9%, to the lowest level since May 2022 as non-food retailers discounted prices. Sterling trades at $1.2688 and €1.1727.

The 10-year Treasury currently yields 4.05%. Brent crude slipped back to $81.65 a barrel, while gold rose to $2,038 an ounce.

Source: Bloomberg

Company News

Diageo has this morning released results for the half-year to 31 December 2023. Performance was generally in line with the trends highlighted in its November trading update, although operating profit came in slightly below expectations. Guidance for FY2025 was also slightly disappointing and, in response, the shares have been marked down by 3% in early trading.

Diageo is a leading global drinks company, with a unique portfolio of iconic brands including Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, and Guinness. The group is an integrated operator, producing and supplying drinks at a variety of price points across strong global distribution routes. In the long term, we believe Diageo is well placed to benefit from the trend towards premiumisation – including its 34% stake in Moet Hennessey, the group generates more than half of its sales from high margin, premium brands. In addition, product innovation and effective marketing allow Diageo to get ahead of consumer trends and drive sales growth. The group has a strong presence in under-penetrated emerging markets, where the number of people of legal purchasing age is set to increase by over 450m over the next decade. Wealth is also increasing in these regions, with the middle class expanding and consumers shifting from local products to higher-margin premium international brands.

The group is targeting annual organic net sales growth of 5% to 7%, underpinned by the strength of its advantaged position across geographies, categories, and price tiers. The aim is to increase its value share of the total beverage alcohol market from 4.7% in 2023 to 6% by 2030.

As previously reported, the group has seen a slowdown in growth over recent months due to a materially weaker performance outlook in the Latin America and Caribbean region.

During the last six-month period, reported net sales fell by 1.4% to $11.0bn. Organic net sales (which excludes M&A and currency impact) declined by 0.6%, just below the consensus forecast of zero growth. Price/mix grew by 4.6%, mainly driven by positive pricing, while organic volume fell by 5.2%.

Total trade market share grew or remained stable in only 30% of total net sales value in measured markets. This was down from 75% in the previous year and primarily driven by a 17bps share loss in North America.

The 23% slump Latin America & Caribbean (LAC) was driven by a strong double-digit net sales growth comparator as well as lower consumption and consumer downtrading due to macroeconomic pressures in the region. Excluding LAC, organic net sales grew by 2.5%. Having conducted a review of inventory levels and monitored performance in the critical holiday season, the group has taken action and has further plans to reduce inventory to more appropriate levels for the current consumer environment in the region by the end of FY2024. As a result, the group expects organic net sales in LAC to decline by 10% to 20% in the second half of FY2024.

In North America, the group’s largest market, organic sales fell by 1.5%, albeit a gradual improvement versus the previous half-year. The decline was due to weaker performance in US Spirits and Canada, partially offset by growth from Diageo Beer Company. Elsewhere, the group achieved decent organic growth: Europe (+3%), Africa (+9%), Asia Pacific (+6%).

Operating profit fell by 5.4% in organic terms to $3.5bn, worse than the consensus forecast for a 4.7% decline. The margin fell by 167 basis points in organic terms to 30.3%, driven by the impact of the decline in the LAC region and increased marketing investment. The group’s pipeline of productivity initiatives drove $335m of savings. Adjusted EPS fell by 7% to 108.1p, versus the consensus forecast of 107.4c.

Free cash flow rose from $964m to $1,462m, well ahead of the $1.0bn market forecast and driven by disciplined working capital management and the positive impact of lapping one-off cash tax payments from the prior year. The balance sheet remains robust – financial gearing ended the period at 2.9x net debt to EBITDA, at the upper end of the target ratio of 2.5x-3.0x. An interim dividend of 40.5c was declared, an increase of 5%. The company is also undertaking a share buyback programme of up to $1bn, with $0.5bn completed during the period.

Looking ahead to the second half of FY2024 (i.e., the six months to June 2024), at the group level, the company still expects to see a gradual improvement in organic net sales and organic operating profit growth compared to the first half while it continues to invest in marketing and in the business to drive long-term sustainable growth. Organic operating profit is expected to decline in the second half compared to the prior year, although the rate of decline is expected to improve compared to the first half. By June, the group expects to exceed its target of $1.5bn of productivity benefits.

The group has also provided guidance for the financial year to June 2025, in which expects to progress towards the delivery of its medium-term guidance with the organic net sales growth trajectory improving compared to FY2024 and organic operating profit growth broadly in line with organic net sales growth. The group remains committed to delivering $2.0bn of productivity savings over the three years to FY2027.

Source: Bloomberg