Earnings Labs

Diageo plc (DEO)

Q2 2021 Earnings Call· Thu, Jan 28, 2021

$77.40

-1.95%

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Transcript

Ivan Menezes

Management

Good morning, everyone. I'm pleased to announce our financial results for the first half of fiscal '21. We have returned to top line growth, driven by strong sequential improvement across our regions compared to the second half of fiscal '20. This is ahead of our expectations at the start of the fiscal year. Our people and our business have shown incredible resilience and agility in this challenging operating environment created by COVID-19. Using insights and data, we've quickly pivoted to changes in consumer occasions and behaviors, and we've responded at pace to increase demand in the off-trade channel. Excellent commercial execution, effective marketing and accelerated innovation have driven strong performance and market share gains. The on-trade e channel continues to be very disrupted with bars and restaurants around the world being impacted by government restrictions. We are well positioned for the reopening of these outlets, but we expect the recovery of this channel to be volatile. Travel Retail continues to be severely impacted by lower passenger numbers. Despite the current challenges, I am cautiously optimistic about the outlook for our business. The fundamental growth drivers for Diageo remain intact, and the actions we've taken and will continue to take will ensure we emerge stronger. I am proud of the support we've given to our customers and communities in response to COVID-19. Last June, we launched Raising the Bar, our $100 million commitment to support the recovery of the hospitality sector around the world. The fund has already benefited over 30,000 outlets in 7 countries with ongoing rollout into additional outlets and countries over the course of the 2-year program. This support includes hygiene and sanitation kits, furniture for outdoor spaces and solutions for table reservations and contactless ordering. Over 70% of the procurement spend funded by Raising the Bar has…

Kathryn Mikells

Management

Thank you, Ivan, and good morning, everyone. As Ivan mentioned, our financial results for the first half of the fiscal are ahead of expectations with strong sequential improvement in performance across all regions. Diageo has shown incredible resilience adapting quickly to this new and changing environment, leveraging the enhanced data and tools we've developed over the past few years. I'll recap on some of the highlights from the first half that Ivan has just taken you through. In the first half of fiscal '21, we delivered organic net sales growth of 1%, reflecting the underlying strength of our business and the fast recovery we have seen, especially in North America and Greater China. Our organic volume growth was down 0.2%, and we delivered 1.2% positive price/mix. Organic operating margin decreased 153 basis points. Cash performance was strong in the half and continues to demonstrate how we have embedded rock-solid day-to-day cash management. We delivered GBP 1.75 billion of free cash flow in the half, which was GBP 787 million higher than last year, driven mainly by working capital benefits. Pre-exceptional earnings per share declined 12.8%, reflecting the lower operating profit with basic EPS down to 67.6p, mainly reflecting the additional impact of unfavorable exchange rates. The interim dividend increase of 2% over the fiscal '20 interim dividend reflects our strong liquidity position and confidence in the long-term health of our business, which enables us to fully invest behind sustainable quality growth initiatives while consistently delivering returns to shareholders. Return on invested capital is at 15.8%, down 175 basis points as a result of unfavorable exchange and the decline in organic operating profit. Total shareholder return was up 9%, driven by an increase in share price over the last 6 months and also supported by our fiscal '20 final dividend. As…

Ivan Menezes

Management

Thank you, Kathy. Our strategic priorities are clear and we are executing strongly to drive quality growth. We are moving at pace in a dynamic environment, investing smartly and doing business in the right way. I will cover each of these areas in more detail, starting with an update on how we are sustaining quality growth and investing smartly. As I mentioned earlier, the drivers of our strong performance are our insights, our tools and our ability to respond at pace. At the same time, we continue to invest for the long term. We are able to activate at speed and scale on the consumer insights that come from our data analytics and tools. COVID-19 has accelerated pre-existing trends in consumer behavior, and we've created brand activations that resonate with consumers in a changed landscape. As at-home occasions have grown, our brands have found creative ways to engage, inspire and entertain consumers virtually. When people couldn't visit their local pub for a pint of Guinness, we used beautiful assets to show the perfect serve for Guinness at home. This drove high engagement and excellent results. In Great Britain, Ireland and the U.S., Guinness has grown market share in the off-trade in the first half of fiscal '21. As consumers have looked to reward themselves and others, we have shown Baileys as an indulgent adult treat and reminded consumers that Johnnie Walker can be the perfect gift for any reason. Changes in how consumers are purchasing alcohol are creating new and fast-evolving opportunities. We have provided our on-trade partners with the tools to offer cocktails to go and created cocktail making kits for on-demand delivery. As e-commerce accelerated, we increased the visibility and ease of shop of our brands for online purchase. We know when times are challenging that our brands…