Diageo interims

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

Diageo released their interim results today and reported that sales were down by 0.5% to £5,900m, although at constant currency and excluding acquisitions the decline was just 0.1%.

 

Reported gross margins were 59.0% compared to 63.2% last year, although if you strip out acquisitions and the foreign currency effect they were similar to last year at 63.1%.

 

Adjusted operating profit (excluding exceptionals, acquisitions and the effect of foreign currency) was £2,073m marginally higher than the £2,060m last year; reported operating profit was £2,040m a decrease of 18.2% from last year.

 

By territory sales and operating profits (not incl. corporate) were:

 

Click on table to enlarge



The worst performing area was Latin America and Caribbean with Venezuela the worst performing country in that territory; due to import restrictions and high inflation, reported Venezuelan sales declined 79%.

 

Reported EPS was 52.2p -22.3% below last year, mainly the effect of foreign currency headwinds.

 

Free cash flow (FCF) saw a welcome improvement to £723m from £327m last year, mainly due to increasing trade payables, which looks like early implementation of their intent to increase payment terms from 60 days to 90 days for their suppliers.  This makes the trailing twelve months £1.6bn comparable to the FCF in 2012, still a way to go (DGE should be generating closer to £2bn), but a step in the right direction.

 

An interim dividend of 21.5p has been declared - an increase of 9.6%.  Management stated that they have a target of 1.8 to 2.2x cover and, since the cover was below the low end of the range last year and bearing in mind the foreign exchange headwinds, they may review the level of dividend for the final, so that they meet at least 1.8x cover.  If they meet the market's expectations for EPS of 95p, that would mean a reduction in the final dividend of -2.2% giving 52.8p for the year an increase of 2.1%. 

 

Commenting on the outlook Menezes said "...We have already taken action to improve the performance of those brands and markets that have not performed as well as we would expect.  This contributed to our stronger second quarter performance and I expect to maintain this momentum through the year..."

 

The next report from Diageo will be the 9 month IMS, which will be their last IMS, as they have chosen to implement the change in reporting requirements declared by the FCA.  So after March there will be just interims and prelims.

A reasonable IMS, with some good news on the cash flow.  Any substantial improvement in earnings though will not occur until its most profitable territory North America improves, having slid from 5% organic growth in Qtr1 2014 almost steadily quarter by quarter to a -2% decline this half year (NA. sales grew at 0.1% for the first quarter of this half year).  The shares finished the day up by 3.1% to 2022p