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Diageo posts Interim Results

Encouraging return to growth, good cash generation and increased dividend

Diageo posted its Interim Results, half year ended on the 31^st December 2020 showing encouraging results, both in India and Globally which has prompted a rationalization of their portfolio and paring of debt. The Interim Results stated that the net sales (£6.9 billion) were down by 4.5%, as the organic growth of 1% was more than offset by unfavourable exchange. The operating profit (£2.2 billion) also declined by 8.3% due to the unfavourable exchange and a decline in organic operating profit.

However the organic net sales were up by 1%, despite a significant impact from Travel Retail and on-trade restrictions. The net sales in North America were also up by 12.3%, offsetting declines in other regions, except for Africa which was broadly flat. The growth in North America was driven by resilient consumer demand, share growth of total beverage alcohol, positive category mix and the replenishment of stock levels by distributors and retailers.

The report also stated that the organic operating profit was down by 3.4%, driven by the channel and category mix. The productivity benefits from everyday cost efficiencies largely offset cost of goods sold inflation. The Net Cash from the operating activities was up by £0.7 billion to £2 billion, and free cash flow was also up from £0.8 billion to £1.8 billion.

This primarily reflected a lower tax payment and working capital benefit driven by reduced creditor balances at the end of fiscal 2020, as a result of reduced sales demand and cost control measures triggered in response to the Covid-19 pandemic. The Creditor balances also recovered to more normalised levels.

The Basic eps of 67.6 pence decreased 14.6%. Pre-exceptional eps declined 12.8% to 69.9 pence, driven primarily by unfavourable exchange and lower operating profit. However the interim dividend increased 2% to 27.96 pence per share.

The improvement comes from the strong sequential performance in all regions compared to the second half of fiscal 2020. However, the manufacturer expects continued impact in the second half of fiscal 21 from on-trade restrictions and disruption to Travel Retail.

Speaking about the results Ivan Menezes, Chief Executive, Diageo said, “We delivered a strong performance in a challenging operating environment, returning to top line organic sales growth during the half. North America, our largest market, performed particularly strongly and ahead of our expectations. Consumer demand has been resilient and the spirits category continues to gain share of total beverage alcohol. Across other regions we delivered strong sequential improvement compared to the second half of fiscal 20. This reflects improved market share performance through excellent execution in the off-trade channel, and the partial re-opening of the on-trade channel in certain markets.”

Menezes expects the ongoing volatility and disruption in the second half of the year, particularly in the on-trade channel, which will make performance more challenging. However the medium and long-term growth drivers and opportunities for the business remain intact and he is confident in the strategy, the resilience of the business and Diageo’s ability to emerge stronger. The organic operating margin improved compared to the second half of fiscal 2020 increased driven by the operating leverage and tight control of discretionary expenditure. The decline compared to the first half of fiscal 2020 reflected an adverse channel and portfolio mix. Menezes expects the margins to improve as the on-trade and Travel Retail recover and with the continued benefit of everyday efficiency.

Diageo India Results

In India, United Spirits reported strong numbers for the third quarter of 2020-21, even though the recovery was not as strong as expected. Despite the current operational challenges, the company was able to report Quarter-On-Quarter (QOQ) volume and revenue growth of 7% and 16% respectively and bring its third quarter revenues close to that of the same period last year. Though more than 85% of trade channels like bars, pubs, and clubs are now operational, they are operating at a low capacity which has impacted the results. Due to Covid protocols and muted celebrations, small gatherings are replacing large events. On the other hand, off trade channels like home consumption are in the upswing and home delivery is also gathering pace.

The third quarter Net Profit also zoomed 79% QOQ, mostly because of the reduction in debt and fall in interest rates. There was a QOQ increase in margin and once volume recovers fully, margin is expected to improve further due to stable input costs and expected price hikes. Price hikes are muted currently due to tough market environments. There was a demand impact in Bengal, where United Spirits was forced to increase prices for its popular brands due to increase in excise rates by the state government.

Despite small improvement in the Covid situation, large celebrations and full capacity in trade channels are still a few quarters away and that explains why liquor companies have not been able to participate in the recent market rally. However, analysts say that these are short to medium term challenges and the long term story on liquor consumption in India is still intact. To increase its market share during these difficult times, United Spirits is focusing on off-trade channels. Home delivery is already showing good traction in states like Bengal and Maharashtra and similar trend is expected from other key states as well.

Diageo strategic Review of Selected Popular Brands

United Spirits Ltd. (“USL”) is also initiating a strategic review of selected Popular brands, continuing the strategy towards long-term profitable growth through premiumising the company’s portfolio. USL’s Popular portfolio comprises around 30 brands and the strategic review will focus on approximately half of this portfolio by volume. This review will not include the McDowell’s or Director’s Special trademarks.

The strategic review is expected to be completed by the end of the 2021 calendar year. Anand Kripalu, Managing Director & CEO, United Spirits Ltd commented, “This review reinforces USL’s and Diageo’s commitment to deliver sustainable long-term growth and improved profitability, through a sharpened focus on core Popular, Prestige and above brands, including international brands.

United Spirits management is also taking steps to reduce its debt further by selling non-core assets and by improving its working capital cycle. United Spirits is a company with strong free cash flows which will contribute towards its plans to become a debt-free company by 2022-23 he added.

Celebrating 200 years of the Johnnie Walker story from Diageo Archive

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Archive Manager Christine McCafferty speaks on what documents dating back to the 1820s can tell us about the Johnnie Walker story so far.

Johnnie Walker is such an iconic brand, with a truly special story, and it’s an honour to be celebrating 200 years since it all began. A big anniversary is of course a great opportunity to tell our brand story, but who needs that excuse. It’s something that I have been privileged enough to do on a daily basis since becoming the Archive Manager for Diageo 23 years ago – to everybody and anybody who will listen. And it’s a great story to tell, so who wouldn’t want to hear it. And we learn so much from understanding the origins of a brand and its journey, what makes the brand unique and what makes it tick.

There’s so much wealth in the Johnnie Walker brand story. It all goes back to John and the grocery shop that was opened in 1820 in Kilmarnock. This is where John started selling and blending his own whiskies for his customers. This is the beginning of an amazing story of three generations of the Walker family that we have continued through to today. It’s a story of an obsession with quality, the Walker’s would never compromise on this and neither would we, and, it’s a story of the pursuit of flavour, all to give consumer’s the best scotch whisky. It’s a story of being distinctive, always wanting to stand out from the crowd, of introducing a slanted label, moving to a square bottle, and, creating one of the most famous whisky icons in the Striding Man figure. It’s a story about taking our product around the world, making it not just the number one selling scotch whisky, but the one enjoyed in every part of the globe. It’s a story about perseverance, surviving the bad times and coming back stronger again each time. And it’s a story of forward momentum, always looking forward and what comes next, with Keep Walking as the perfect mantra. I could add words like pioneering, experimental, innovative, confident, bold, brave, ambitious – all perfect to describe Johnnie Walker and those that have created it and worked on the brand. It’s unique, it has a special place in culture, in people’s lives – and everyone has a story to tell.

And my story is all about the amazing content we have in our industry leading archive and how I share this to not only to build the brand story, but to bring it to life. It is a real privilege to be able to access original documentation right back to the time of John Walker and to see what insights they can give us into the brand story and DNA. Here’s a couple of my favourite items from the archive:

Jhonnie Walker Grocery Shop Inventory list from 1825

John Walker’s grocery shop stock inventory, 1825. This inventory is the earliest record from the shop. It lists household products; wines and spirits, including whisky of course; and exotic products such as tea from China and pepper from Jamaica. It’s fascinating to see what John was selling in those initial times and the impact they no doubt had on how he felt about flavour as he started his blending journey.

John Walker & Sons annual balance book, 1857-1886 – John’s son Alexander took over the business in 1857, evolving it from a small, local shop to a thriving commercial enterprise. This stock book documents the widening range of products, including many more whiskies and different types of tea, dried fruits, and spices. These aromas and flavours inspired Alexander to create the company’s first commercial blend, `Old Highland Whisky’ and it’s a time I would love to travel to. Imagine wandering around the aisles of the shop, soaking up the atmosphere.

A pic from the `John Walker & Sons’ book by Alfred Barnard, 1893 and their Sampling Room. This book is only one of the two such copies known to exist today

`John Walker & Sons’ book by Alfred Barnard, 1893 – In 1879 John Walker & Sons opened what were considered the most advanced warehouses in Scotland. When renowned whisky writer Alfred Barnard visited the imposing new premises on Kilmarnock’s Strand Street, he noted the Walkers’ focus on innovation and craftsmanship throughout their whisky-making, bottling, and distribution processes. A true snapshot of the business at that time, this book is one of only two copies known to exist today, and gives us a truly special window into the remarkable business being ran by that time.

The Jhonnie Walker Still Going Strong image

John Walker & Sons `Around the World’ book, 1920s – By 1920 Johnnie Walker was being sold in over 120 markets. To celebrate 100 years of the business and the global reach of their brands, John Walker & Sons produced their Around the World book, which essentially is an early travelogue. The book features all the markets in which Johnnie Walker was being sold and was a thank you to their agents around the world for their contribution to the success of the business. I love how important relationships were to the Walker’s as they established their global business, just as it is for us today.

I could, of course, go on and pick examples of beautiful historical packaging, ground-breaking advertising, photographs from all around the world, and all these items have a role to play in piecing the brand story together. The items themselves are fascinating, and I love seeing how people react to seeing the original documentation that takes us back in time. But the insights that these items give us are equally as important. I like to think of myself as a bit of a detective or journalist, pulling snippets of information and materials together from various sources, to create a really rich and vibrant story relevant for any audience. There’s certainly no shortage of materials and stories.

And we continue to add to these collections by collating materials created for the brand today so we can continue to tell the brand story as it evolves for future generations. Just as we look back with pride on the legacy we have inherited from our founders and all those who have worked on the brand, we too will leave our stories in the history books for those that come next to be inspired by. It’s fascinating to think what a brand like Johnnie Walker has lived through, 200 years of world events, and, it’s exciting to think about where our journey we take us in the next 2, 20 and 200 years. I can’t wait to see, bring it on!

UP Govt approves New Excise Policy

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The Yogi Adityanath-led government has approved its new excise policy which is set to reduce the excise duty on the alcobev products in the state. The new policy includes number of updates that reduce excise duty in certain categories including a slew of measures as part of its new excise policy.

The most notable change is the reduction in duty to 200% on beer from the erstwhile 280%. The shelf life of the product has also been extended to nine months. The government has also done away with the rule of needing collector’s permissions for opening liquor shops within five kms of neighbouring border/district.

One of the other key notable change in the policy is also to move to complete digitisation of the department in the 2021-22 year, a move that is welcomed by many manufacturers. Needless to say that the since the lockdown most states have adopted digitisation, which has been working well for them. Efforts would be made to computerise all the processes and procedures of the excise department under the Integrated Excise Supply Chain Management System (IESCMS).

The new policy will also allow sale of IMFL and imported liquor in the scotch category, with a maximum retail price of ₹ 2,000 or more, to be permissible in mono-cartons. The government is also looking at encouraging more manufacturers to invest in production of wine within the State.

Special incentives for Wines has also been added into the policy

As an incentive the wines that are made out of locally produced fruits shall be exempted from excise duty for a period of five years. However there is no clarity on how much percentage of local fruits needs to be used yet, something that will become clear in time. The local wine merchants will also be allowed to retail wine with wine taverns also allowed on its premises.

It is also now mandatory to obtain a license to keep liquor more than the prescribed limit at home now. In a statement released by the government they said, “to provide good quality liquor at economic prices, UP Made Liquor (in Tetra-pack and of 42.8% strength only) made from Grain ENA, shall be sold at an MRP of ₹ 85 through country liquor shops”.

It is now mandatory to have a PoS Machine at retail stores

It is also now mandatory for the retail shops to install card machines for selling the liquor. Also a select premium retail vendors will also be permitted at airports. Wine-tasting facilities and sale of drinking accessories shall be allowed at premium retail vends.

Ambrosia Awards 2017 – Packaging Jury Round

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With the 11th edition of the Ambrosia Awards Packaging category getting more and more competitive, a star-studded jury went through close to 150 products to choose the 9 winners of the Packaging Category of the Ambrosia Awards 2017. See what they had to say about the winners and why they chose them?