Diageo prelims

Diageo is the world's leading premium drinks business, I have a holding in my income portfolio (epic code: DGE)

Diageo released their preliminary results last Thursday and with economic weakness in emerging markets they declared net sales for the year of £10.3bn which produced organic growth of just 0.4% and with adverse foreign exchange movements, reported sales declined by -9.2%.  The third quarter appeared to be the weakest period with a -1.3% organic decline, with Asia Pacific declining the most by -19%. 

In China the effects of the government's anti extravagance campaign severely impacted sales, but with such a wide geographic spread there were some bright spots such as India, North America, Latin America and the Caribbean.

In North America Diageo make the point that beer's share of the alcoholic beverage market is declining, while spirit consumption is increasing up from 28% to 32% over the last 10 years - increasing Diageo's available market.

Operating profit before exceptionals was £3,134m a decline of -9.9%, but up 3% on an organic basis; reported operating profit at £2,707m was down -20% as Diageo wrote down £264m in its Shui Jing Fang investment.

Adjusted EPS at 95.5p was -7.4% below last year and reported EPS for the continuing businesses was 92.6p down -5.5%. The final dividend was increased by 9.2% to 32p making 51.7p for the year an increase of 9.1%.

Free cash flow was £1,228m, £208m below last year and is the fourth year of decline.  I have commented previously about Diageo's negative cash flow trends here.  Net debt increased by £275m to £8.9bn and represented gearing of 130%, debt was high at 2.7x EBITDA and operating cash flow was just 20.2% of net debt, although interest costs are covered 7x.

Not a great set of results, but Diageo is still earning operating margins of over 26%, a ROCE of over 17% against a WACC of 6.4%.  Diageo's weakness is in the rate it turns its capital over and its FCF generation, its FCF yield is just 2.8%.